Greece activates emergency financial bailout

Greece’s decision Friday to accept an international bailout package staved off an immediate bankruptcy crisis, but the euro risks further instability if Athens and other European capitals fail to bring down their enormous budget deficits, analysts said.

In a nationally televised address, Greek Prime Minister George Papandreou told his countrymen that “the moment has come” for Athens to tap into a $53-billion bundle of emergency loans from its European neighbors and the International Monetary Fund. Papandreou said it was a national necessity to accept the funds if the government is to keep paying its bills.

But it was also an embarrassment for a nation that had until recently insisted it would not have to resort to such a rescue deal. And experts warn that long-term debt problems still remain for Greece and other countries that use the euro, which is facing its severest test since its launch 11 years ago.

Papandreou’s announcement came after his country took a beating in the global financial markets this week. Skittish investors drove up the cost of borrowing for Greece to punishing levels, forcing it to seek relief from the lower-interest loan package, which was unveiled two weeks ago. Athens had characterized the deal as merely an insurance policy to soothe fears of a national default.

“We thought that this support mechanism would calm markets enough for us to raise the money we needed to meet borrowing requirements,” a somber Papandreou said in his address from the remote Aegean island of Kastellorizon. “The markets, though, did not respond.”

Greek negotiators were meeting with their European counterparts and IMF officials to finalize the details of the rescue deal.

News that Greece would take advantage of the loan package immediately boosted the euro in worldwide currency markets. The euro, which has plunged in value since Greece’s debt crisis began emerging in October, rose Friday to $1.34 in New York trading, up a penny.

Julian Callow, an economist with Barclays Capital in London, said the bailout would be sufficient for Athens to meet its borrowing needs for the rest of the year.

By putting “a firewall around Greece,” the deal also eased fears, at least temporarily, of a similar crisis engulfing other euro countries grappling with huge budget shortfalls, including Spain and Portugal, Callow said.

“These countries get a break to adjust their own deficits. But they have to move fast, perhaps arguably faster than they’re doing so far, because this could all come back at a later stage, and Europe doesn’t have the capacity to bail out all these countries,” Callow said.

He said Greece and other countries still had to confront doubts over their crushing level of public debt.

“You address the short-term liquidity issues, but you don’t fully address the longer-term solvency issue,” Callow said.

The bailout package should allow Athens to borrow up to $40 billion from fellow euro countries at a rate of about 5%. The rate is lower than what Greece can secure on the open market, but higher than what it might have wanted.

The 5% level came at the insistence of Germany, Europe’s economic powerhouse, which has fiercely resisted the idea of a bailout. Germans have pressured their leaders not to help rescue a country that they say brought on its own problems through wasteful spending and dishonest accounting.

German Chancellor Angela Merkel was also the main force behind bringing in the IMF, perceived as a major blow to European pride. The international agency could provide Greece an additional $13 billion, or slightly more if warranted, in loans on condition of tougher austerity measures from Athens.

Although the IMF’s involvement exposes the 16 euro-using nations to criticism that they can’t solve their own problems, Berlin insisted that there be some demonstrated consequence for Greece’s having flouted the bloc’s rules regarding deficit spending.

“German public opinion has been the principal reason for mixing this up as a package,” said Iain Begg, a professor at the London School of Economics.

Greece has been in investors’ cross hairs since October, when the government revealed an alarming budget deficit of 12.7% of gross domestic product, four times the rate allowed under rules for countries that use the euro.

On Thursday, the European Union said it had recalculated the budget gap at 13.6%. Moody’s Investors Service then lowered Greece’s credit rating, which sent borrowing rates soaring.

By Thursday night, Greek Cabinet members were urging Papandreou to “push the button” on the bailout package, an advisor said.

“That was enough for him,” said the advisor, who asked not to be identified because of his proximity to the talks. “The imperative was to restore calm.”

Critics said Athens waited too long and subjected the country to unnecessary uncertainty.

“This should have happened earlier,” said Theodoros Pelagidis, a professor of economics at Greece’s Piraeus University. “It was a risky escapade to allow this to drag on for two to three weeks.”

Athens has unveiled an austerity package, entailing deep spending cuts and some higher taxes, to reduce its deficit. But the measures have run into heavy opposition from union and other workers, who have mounted major street protests.

Social unrest could worsen if the IMF orders further cuts. A poll this week found that a majority of Greeks viewed IMF involvement as more likely to be harmful to their country than helpful.

henry.chu@latimes.com

Carassava is a special correspondent.