MercoPress. South Atlantic News Agency

Market test for Greece’s Euro zone and IMF 51 billion USD “soft” loan aid

“This is a clear and strong commitment” said Jose Manuel Barroso EC president, but will it be enough?

European finance officials agreed Sunday to make an estimated 41 billion US dollars in loans available to Greece to help fight the threat of default. The loans would be charged at below-market rates to enable Athens to keep its borrowing costs down as it struggles to raise money to finance its runaway public debt.

Global markets have punished Greece in recent days with high interest rates, reflecting widespread anxiety over Athens' creditworthiness.

However the Greek government continues to insist that it will not need to resort to assistance from fellow European countries or the International Monetary Fund to stay afloat. But Athens has called on its neighbours to show their willingness to extend a hand if necessary, to calm jittery investors and thwart speculators betting on a default.

On Sunday, after days of Greece being battered in the global markets, Finance ministers from the Euro zone, comprising the 16 nations that use the Euro currency, held an emergency videoconference to discuss the potential loan package, ahead of the markets reopening Monday.

They announced that, if need be, they would make the 41 billion USD available to Greece at interest rates of about 5%, lower than what Athens could find in the marketplace. The IMF would chip in an additional 14 billion USD, officials said.

The agreement makes effective a pledge that the Euro zone made last month to help Greece but one that gave no specific amounts and failed to satisfy nervous investors.

“This is a clear and strong commitment” Jose Manuel Barroso, the president of the European Commission, said in a statement. “It shows that the Euro area is serious in doing what is necessary to secure financial stability and about its commitment to give support to Greece.”

Sealing a deal has been hindered by objections from Germany, Europe's biggest economy and a Euro zone member, which is worried that a rescue package would set the wrong precedent.

German public opinion runs strongly against bailing out Greece, whose government shocked international investors in October when it revealed a budget deficit exceeding 12% of GDP, far greater than what is allowed under Euro zone rules. Many Germans believe that they should not have to pay for Athens' mistakes.

But with the stability of the Euro at stake, as well as pride in having forged a common currency, European finance officials have come to acknowledge the necessity of helping out one of their own.

Furthermore and according to Professor Carmen Reinhart, a world authority on sovereign defaults, European banks are highly exposed with Greek debt. Allegedly French banks hold €80bn and German banks €40bn (and British banks too) which they purchased at a few basis points over German Bunds in 2006 and 2007. “Creditors bought the debt on the basis of a political calculation that EMU would bail out Greece if necessary”.

According to Prof Reinhart a Greek default would be twice the size of the two largest defaults in history put together — Argentina and Russia — at least in nominal terms, nearing €300bn.

While welcoming Sunday's announcement, Athens said it can solve its problems without outside assistance. The Greek government has proposed a multibillion-dollar austerity package that it says will help bring down its deficit by several percentage points this year.