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Tags: EU | Europe | Financial | Crisis

Weak Euro Forcing EU Nations to Financially Rescue Greece

Wednesday, 10 February 2010 06:15 AM

Wealthy European nations are moving closer toward swallowing a bitter pill: rescuing Greece from its overspending before its debts drag down the euro and stock markets all the way to Wall Street.

Stocks in the U.S. and Europe rose Tuesday on expectations of some kind of decisive action to prevent a Greek debt default that could spread to other countries, undermining Europe's hesitant economic recovery.

European Union leaders will issue a statement on Greece's debt crisis during a Thursday meeting, officials said, without giving details of what it would say.

Markets reacted well to news that European Central Bank's president Jean-Claude Trichet would make a rare appearance at the summit in Brussels — which they saw as confirmation that some help would be discussed.

The crisis has exposed the EU's Achilles' heel — states remain independent to spend as they wish, but their decisions can affect all 16 euro zone nations.

Countries that help Greece risk having their own borrowing costs rise as a result, and could see other struggling euro zone economies get in line for aid.

Bernard Valero, a spokesman for France's foreign minister, said Tuesday that "we must help" Greece. "It's about helping a friend ... we are the European family." He did not give any details of that help.

Germany is also looking at ways to help Greece, but nothing has been decided yet, Michael Meister, deputy parliamentary leader of Chancellor Angela Merkel's party, was quoted as saying.

"The top priority for (the party) is a stable euro," Meister told the Financial Times Deutschland. He added that any aid would come with the demand that the Greek government make radical spending cuts and economic reforms to get its house in order — some of which Athens is already planning.

A bailout for profligate Greece could prove unpopular with German voters who are fond of economic prudence.

European stocks inched up on Tuesday, and the euro rose by three-quarters of a cent to $1.3725, down from $1.51 in December. The Greek stock market rose by 4.5 percent.

The EU's statement will have to go beyond the bland words of confidence in Greece to stop the euro's slide.

The euro is trading near an eight-month low against the U.S. dollar and markets are increasingly pessimistic.

"Thursday's EU summit is the real litmus test," said VTB Capital analyst Neil MacKinnon. "If it fails to come up with any debt restructuring package or a quasi-bailout, then the pressure on the euro will increase."

MacKinnon said traders' bets against the euro have now reached a record.

HSBC analysts were skeptical that the Thursday talks could stop the slide in euro pessimism, saying "we'd be greatly surprised if those meetings concluded in a manner which diminished market concerns about the matter."

An unprecedented bailout for a euro member would be a blow to the monetary union by showing that the framework set up to support it is insufficient to ward off a crisis.

Greece's budget deficit stood at 12.7 percent of its gross domestic product in 2009, more than four times the EU's 3 percent limit. The country's public debt has exceeded 113 percent of GDP.

Other countries also have run afoul of the limits, despite EU warnings and scoldings.

Continued market skepticism about government finances means Greece and other troubled countries — such as Portugal, Spain and Ireland — are already paying higher interest rates.

That could force them to intensify austerity measures — less spending and more taxes — that could cut wages, particularly in the public sector, and reduce or eliminate any economy stimulus for flagging growth.

Greece on Tuesday tried to appease EU partners and markets by unveiling sweeping proposals to increase retirement ages, hike taxes on the powerful and wealthy Orthodox Church and force street vendors to issue receipts.

Greek Prime Minister George Papandreou visits Paris on Wednesday for talks with French President Nicolas Sarkozy on the debt situation.

EU governments could agree to jointly underwrite Greece's debt — but this could hike the cost of their own borrowings.

They could also provide a loan to Greece — but it is uncertain that they could or would provide enough to give Greece long-term relief. Greece is looking to borrow some 51 billion euros ($70 billion) from bond markets to fund its budget gap this year.

Another option would be bonds, issued jointly by European governments to raise money from markets.

EU and ECB officials have talked this down but European socialists — including Greece's current government — support the idea because it could ease harsh spending cuts.

EU nations do not want to let Greece off the hook.

Any option would force Greece to make long-delayed reforms to address rife tax evasion, change rigid labor market rules and overhaul an inefficient and high-spending pension and health care system.

In Munich, Germany, teacher Sonja Trott said she wants any rescue money tightly controlled to ensure that it is used effectively. The 31-year-old said she didn't like seeing her taxes spent on Greece, but that it may be necessary.

"I guess we can't afford to allow having one member state financially falling apart," she said.

© Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Wealthy European nations are moving closer toward swallowing a bitter pill: rescuing Greece from its overspending before its debts drag down the euro and stock markets all the way to Wall Street.Stocks in the U.S. and Europe rose Tuesday on expectations of some kind of...
Wednesday, 10 February 2010 06:15 AM
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