Friday, April 30, 2010

Greece Economic Crisis Update: IMF Promises More Aid While German Chancellor is Tested

April 28, 2010

I.M.F. Promises More Aid for Greece as European Crisis GrowsBy

New York Times

Hoping to quell its biggest crisis since the Asian woes of 1997, the International Monetary Fund promised on Wednesday to increase the 45 billion-euro aid package for Greece to as much as 120 billion euros over three years.

The fund is racing to conclude an agreement for more painful austerity measures from Greece by Monday, clearing the way for the government to receive funding and reassuring investors worldwide that European debt is safe. On Wednesday, Dominique Strauss-Kahn, the I.M.F.’s forceful managing director, pledged the higher aid amount, equivalent to $160 billion, in a further bid to reassure investors. The funds would come both from the I.M.F. and from other countries using the euro.

But as has frequently been the case during Europe’s debt crisis, the promise of help was overshadowed by more disturbing news — in this case a cut in the debt rating of Spain by a major agency just a day after debt downgrades for Portugal and Greece.

The growing fear is that the fallout from Greece and even Portugal — which together compose just 5 percent of European economic activity — could be a mere sideshow if Spain, with its much larger economy, has difficulty repaying its debt.

While major stock markets stabilized after Tuesday’s sell-off and the cost of insuring the debt of Portugal and Spain declined, the euro slid further on the news of Spain’s downgrade by Standard & Poor’s. Banking stocks in some of the smaller European economies were among the biggest losers on the day. Major stock indexes in the United States rose slightly, with the Dow Jones industrial average ending up 53 points, at 11,045.27.

In many ways, the current troubles in Europe go to the heart of the fund’s new mission to serve as a firewall in the financial crisis — an objective that was bolstered by $750 billion in fresh capital from Group of 20 countries last year.

Unlike its previous efforts in smaller, emerging economies in Asia in 1997, and more recently in Hungary, Romania, Latvia and Iceland, the fund has been hamstrung in its efforts to act quickly and decisively by political concerns within the European Union, which insists on assuming a leading role.

“It is a problem,” said Alessandro Leipold, a former acting director of the I.M.F.’s European department. “It should not be that difficult — they did it in Hungary and Latvia. But the egos are different in industrialized countries.”

A case can be made that if Greece had sought help from the fund late last year after the forecast for its budget deficit doubled, the amount of support needed to reassure investors would have been much less than the 120 billion euros that even now might not be enough.

In that vein, Mr. Leipold said Portugal and Spain should ignore any stigma associated with an I.M.F. program and make the case to the European Commission in Brussels that asking proactively now for aid would soothe skeptical markets and save Europe billions in the future.

“The market has seen its worst fears come true,” he said. “What it needs is a surprise on the upside.”

Concerns have already surfaced in Congress that the broad demands of the sovereign debt crisis will quickly exhaust the I.M.F.’s reserves and leave the United States, the fund’s largest shareholder, with the bill.

Representative Mark Kirk, a Republican from Illinois, said such a drain could occur if Portugal, Ireland and Spain sought I.M.F. aid at the same time. Mr. Kirk worked at the World Bank during the 1982 debt crisis in Mexico, which came close to depleting the fund’s reserves.

“We have seen this movie before,” he said. “Spain is five times as big as Greece — that would mean a package of 500 billion.”

Mr. Kirk sits on the House Appropriations Committee that oversees I.M.F. funds and said that he had already asked for hearings on the fund’s ability to handle a European collapse.

In Athens, the Greek government had no choice but to seek an I.M.F. solution after its costs of borrowing skyrocketed, but that has not made the negotiations for aid any easier.

The fund has sent one its most senior staff members, Poul Thomsen, who has overseen complex fund negotiations in Iceland and Russia, to assist Bob Traa, the official responsible for Greece, to work out a solution.

According to people who have been briefed on the talks, the aim is to secure from Greece a letter of intent for even deeper budget cuts than the tough measures imposed so far, like reductions in civil service pay, in exchange for emergency funds.

Steps being discussed include closing down parts of the little-used Greek railway system, which employs 7,000 people and is estimated to lose a few million euros a day; limiting unions’ ability to impose collective bargaining agreements, which lead to ever-higher public sector pay; cutting out the two months of pay that private-sector workers get on top of their annual pay packages; increasing the retirement age and cutting back on pensions; and opening up the country’s trucking market in an effort to lower extremely high transportation rates that have hindered the country’s competitiveness.

With Greece now shut out of the debt markets, it has little leverage to resist — especially in light of the 8 billion euros it needs to repay bondholders on May 19. Analysts expect a deal by next week at the latest.

But whether a Greek resolution calms investor fears about the ability of Portugal and Spain to repay their own maturing debt remains unclear.

In a recent note to investors, Ray Dalio, founder of Bridgewater Associates, one of the world’s largest hedge funds, described the market concern as intensely focused on Spain.

“Spain’s cash flows (current-account and budget deficit) are extremely bad,” Mr. Dalio and his colleagues wrote in a February letter. “Spain’s living standards are reliant on not just the roll of old debt, but also on siApril 28, 2010

Merkel Tested as Escalating Greek Crisis Hurts Euro


BERLIN — Chancellor Angela Merkel’s strategy for dealing with Greece’s untenable debt problem was to stall and hope the crisis did not demand action until after a critical state election in early May. On Wednesday, the clock finally ran out.

Mrs. Merkel’s hand was forced by mistrustful credit markets and the ratings agency that downgraded Spain, Portugal and Greece in a matter of just two days. As the crisis worsened, political calculations had to take a back seat to the more basic task of ensuring the stability of the euro currency that replaced Germany’s beloved mark.

Mrs. Merkel said after meeting with Dominique Strauss-Kahn, the managing director of the International Monetary Fund, that negotiations with the Greek government had to be accelerated and that Germany would do its part to safeguard the euro.

But she sounded less than happy about it. At a second news conference later the same day, Mrs. Merkel grumbled that Greece’s entry into the euro zone was not based on “sustainable factors,” making the present crisis particularly difficult to deal with. She went on to say that “we cannot allow the same situation with countries as with Lehman Brothers.”

Opinion surveys in Germany have for months shown a sizable majority of the population here opposed to any bailout for Greece, with a constant drumbeat of news media coverage about Greek profligacy helping fuel the discontent.

“If Merkel said, ‘Today we give the money to Greece,’ this would be the first domino against Europe in Germany,” said Wolfgang Nowak, a former senior adviser to Mrs. Merkel’s predecessor, Gerhard Schröder, and head of Deutsche Bank’s International Forum. “It would invite populists from all sides to attack.”

But the costs of not acting have also grown, and the potential risk of the instability’s spreading to the rest of Europe have become clearer as well. “Why the fire department has been scratching its head for weeks instead of operating the pumps, I don’t understand,” said the former German foreign minister, Joschka Fischer, on Wednesday, according to the German news agency DPA.

According to Jürgen Trittin, one of the Green Party’s parliamentary leaders who sat in on a meeting with Mr. Strauss-Kahn on Wednesday, the cost of the Greek bailout could reach $160 billion over three years, with Germany’s share up to $32 billion. DPA quoted Economics Minister Rainer Brüderle as saying that the overall cost could be even higher, about $180 billion.

Asked about the sum cited by Mr. Brüderle, a minister in her own government, a clearly displeased Mrs. Merkel responded, “I have asked over and over again in the past days that figures not be named, as long as figures are not in conjunction with a completed program.”

Throughout the crisis, which broke out earlier this year, Mrs. Merkel has acted with an eye to the crucial local election in North Rhine-Westphalia on May 9.

The North Rhine-Westphalia election has the potential to upset the existing balance of power. At stake is not only the state legislature, but also control for Mrs. Merkel’s coalition over the little-watched upper house of Parliament, the Bundesrat, which has to sign off on legislation.

Billions of dollars in assistance for Greece may not play well with voters in a state with its own financial problems. “There’s currently a debate on the finances and budgets of local communities,” said Andreas Blätte, a political science professor at the University of Duisburg-Essen in the state of North Rhine-Westphalia. “There’s a sense that money is really scarce.

“In many local communities, fountains are not switched on and flowers are not planted in the public parks because of a lack of money,” Mr. Blätte said. “Bridges that need reconstruction work are not renewed.”

From the very start of Mrs. Merkel’s second term, strategists from all the major parties were concerned about the spring vote in North Rhine-Westphalia. The state has more eligible voters than Greece’s entire population and produces nearly a quarter of Germany’s economic output.

It would not escape the attention of a master tactician like Mrs. Merkel that it was defeat in North Rhine-Westphalia, with its 18 million residents, that led to the special parliamentary election that cost her predecessor his job and cleared the way for her to take power.

For months Mrs. Merkel played for time, talking tough on Greek debt and the need for Athens to institute strict austerity measures while hoping to stave off a bailout decision that many believe is inevitable until after voters in North Rhine-Westphalia go to the polls.

But some analysts say that the German people’s desire for stability, and particularly a stable currency, will ultimately outweigh their distaste at bailing out the Greeks.

Gerd Langguth, professor of political science at the University of Bonn, said the political fallout from joining in the rescue of Greece, including on the election in the state of North Rhine-Westphalia, would be less than many had predicted.

“The people in Germany know that if this operation doesn’t work, the whole euro would be damaged and this is damage for Germany,” he said.gnificant further external lending. For these reasons, we don’t want to hold Spanish debt at these spreads.”

Matthew Saltmarsh and Sewell Chan contributed reporting.

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