Greece to activate emergency loan

Prime minister calls for financial aid from the eurozone and International Monetary Fund.

The Greek government has requested activation of a €45 billion emergency loan facility from eurozone governments and the International Monetary Fund in a last-ditch attempt to save the country from default.

Greece’s decision is unprecedented in the history of the eurozone, which has previously adhered to the principle that governments should not look to each other for budgetary support.

George Papandreou, Greece’s prime minister, said it was a “national and pressing necessity” to activate the aid facility. “Our partners will decisively contribute to provide Greece with the safe harbour that will allow us to rebuild our ship,” he said.

The European Commission said the necessary procedural steps would be taken as soon as possible to deal with Greece’s request. 

“All this will take place speedily, we are not foreseeing any obstacles,” a spokesman for Olli Rehn, the European commissioner for economic and monetary affairs, said.

He said that the Commission and the European Central Bank would submit an opinion on the Greek request to eurozone finance ministers, who would then take a decision on whether to release the money. He said these steps would be taken over the next few days.

Ministers must decide whether Greece has exhausted other options for staving off default – a key criteria for the mechanism to be activated. Greece did, however, hold preliminary discussions with the Commission and governments prior to making its request, and opposition to activating the mechanism is not expected.

Dominique Strauss-Khan, managing director of the IMF, said: “We are prepared to move expeditiously on this request.”

Papandreou took the decision to request support in response to speculation on the financial markets about Greek debt. Yields on Greek ten-year bonds yesterday reached 8.92%, the highest level since 1998, and 580 basis points more than the yield on German bonds. The cost of credit default swaps (a type of insurance against default) on Greek sovereign debt reached an all-time high, smashing through the 600 basis point barrier for the first time. This convinced the Greek government that its efforts in recent weeks to restore confidence in the strength of its public finances had failed, and that it would have to seek support to prevent default.

Ministers agreed on 11 April to set up the emergency loan facility as a response to Greece’s debt crisis. It would provide finance to Greece at rates substantially lower than it is currently paying on the markets. According to this week’s IMF rates, Greece would pay between 1.26%-3.26% on its loans from the international lender.

The rate applicable to its loans from the eurozone will be calculated by adding certain charges onto the Euribor rate used in the interbank market. The rate on a three-year fixed-rate loan granted by the eurozone on 5 April would have been around 5%.

The eurozone will provide around two-thirds of the total support from the facility, which is expected to run for three years. The facility has a total budget of around €45bn for 2010. Its budget for future years has yet to be determined. All eurozone governments have committed themselves to contribute funds if the mechanism is activated.

Officials from the Commission, European Central Bank and IMF have been in Athens since Wednesday discussing the technical details that will apply to the loans. The Commission said these discussions would now be concluded as swiftly as possible. The IMF and Commission are expected to extract concessions from Greece on painful structural reforms to slash the deficit and boost competitiveness. Rehn said yesterday that Greece needed to commit to further reforms in 2011-12 if it was going to meet its budget-reduction targets.

Athens was yesterday gripped by protests against the use of austerity measures to bring the deficit down.

Greece is battling to control an enormous budget deficit which reached at least 13.6% of gross domestic product in 2009, the second highest in the eurozone. Eurostat, the EU’s statistical office, has warned that the real figure may be more than 14%.

A decision by credit ratings agency Moody’s yesterday to downgrade Greece’s credit rating served to harden investors’ conviction that Greece would be unable to honour a €8.5 billion bond repayment on 19 May.

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