Greece

As the eurozone and the International Monetary Fund prepare a lending package to rescue Greece from financial crisis, recent history provides both an inspirational story and a cautionary tale, the Financial Times reported. The inspirational story is Brazil, where a $30 billion IMF package in 2002 allied to a plan for fiscal stringency helped restore confidence in the government's debt.

Greece capitulated to market pressure on Thursday and took an important step towards a bail-out from its eurozone partners and the International Monetary Fund as it formally sought “consultations” over a €30 billion-plus ($40 billion, £26 billion) loan package to stave off default, the Financial Times reported. In a letter to the European Commission, Greece’s finance minister, George Papaconstantinou, said Athens wanted to discuss “a multi-year economic policy programme with the Commission, the European Central Bank and the International Monetary Fund”.

European Union finance ministers meet in Madrid today to discuss how to curb swelling budget deficits as Greece moved closer to asking for emergency aid to finance the region’s biggest shortfall, Bloomberg reported. Greek Prime Minister George Papandreou yesterday asked for a meeting with the EU, the International Monetary Fund and the European Central Bank, which agreed last week to back a 45 billion-euro ($61 billion) rescue package for the cash-strapped nation. Talks will begin in Athens on April 19.

The financial crisis in Greece is best understood by looking at the hard numbers, The Wall Street Journal reported in a commentary. Over the next five years, Athens has to raise €240 billion, roughly the country's current gross domestic product. Of that amount, €150 billion is to pay down the principal owed on maturing bonds. The rest is interest. This illustrates why the euro-zone offer of a €30 billion standby credit facility is just a drop in the bucket compared to Greece's overall cash requirements.

European leaders’ pledge to help Greece with an unprecedented aid package may be a stepping stone on the way to a more unified fiscal policy, said economists at Barclays Capital and Commerzbank AG, Bloomberg reported. Euro region officials have spent the past two months debating whether to maneuver around the rules of the Maastricht Treaty, which left the bloc without a common finance ministry to match its shared central bank. The treaty also contains a “no bailout clause,” making it harder for governments to agree on fiscal transfers for euro members facing fiscal crises.

A top Spanish official said Monday that Sunday's agreement on details of a Greek bailout package showed the euro zone won't allow the default of a member nation, Dow Jones reported. "It shows the unanimous decision of the European Union, and especially the euro zone, to support financial stability, and it leaves no room for the hypothesis that a euro-zone country could ever default," Diego Lopez Garrido, secretary of state for European affairs, said Monday.

Finally there is a deal. It came late, and only after the financial markets – and a rating agency – forced the European Union to put up or shut up. It will provide Greece with emergency loans at a rate of about 5 per cent, which is lower than present market rates. There is no agreement yet about the overall amount of money to be disbursed. But I hear that the total figure will be much larger than has been widely reported – somewhere between €50bn and €60bn, the Financial Times reported in a commentary. It is not the worst conceivable deal.

As interest rates on Greek debt spiral upward again, the question facing Europe is no longer whether Athens has the political will to cut spending and raise taxes to curb its gaping budget deficit, but whether Greece will run out of money before it gets the chance to do so, The New York Times DealBook blog reported. With the rate on 10-year Greek bonds reaching as high as 7.5 percent on Thursday, up from 6.5 just three days ago, the cost of insuring against a Greek default hit a record high.

The euro has been under pressure this week after media reported Greece wanted to renegotiate a joint EU-International Monetary Fund aid deal reached last month, Reuters reported. Greece denied the reports, but that has had little impact. On Tuesday, the yield spread between 10-year Greek and German government bonds at one point exceeded 4 percentage points, the widest since the euro's launch. Greece needs to sell more bonds to meet its funding needs. It has raised about 23 billion euros of a projected 2010 requirement of 53.2 billion euros.

I am willing to risk two predictions. The first is that Greece will not default this year. The second is that Greece will default. The Greek government has demonstrated that it can still borrow at a rate of about 6 per cent but if you do the maths on the public debt dynamics, as I did recently, it would be hard to arrive at any other scenario than an eventual default, the Financial Times reported in a commentary. The adjustment effort needed to prevent a debt explosion is extremely large.