Greece Gets Help, but Is It Enough?

Greece announced Sunday that it had reached an agreement on a long-delayed rescue package that will require years of painful fiscal belt-tightening, but the deal probably will not defuse the potential threats to other European countries also suffering from mounting debts and troubled economies.

Euro bills and coins in cash register tray
Euro bills and coins in cash register tray

"I have done and will do everything not to let the country go bankrupt," Prime Minister George Papandreou said in a televised address that urged Greeks to accept "great sacrifices" to avoid "catastrophe."

The bailout, which was worked out over weeks of negotiations with the International Monetary Fund and Greece's European partners, calls for as much as €110 billion, or $145 billion, in loans intended to stave off an immediate debt default and stop the spread of economic contagion to other parts of the region.

But analysts warned that Greece itself has not yet solved its fundamental problems and that other sovereign debt crises could arise as lenders and market speculators turn their attention to a handful of similarly vulnerable nations.

"The immediate impact may be soothing, but the inflammation will soon show up again," predicted Edward Hugh, an economist in Barcelona who writes for the influential Fistful of Euros blog. "My feeling is the rot has now gone too far."

In Greece, Mr. Papandreou, the scion of a Socialist dynasty whose father, Andreas Papandreou, helped erect the sprawling Greek welfare state when he was prime minister in the 1980s, sought to embolden Greeks to accept what is expected to be the greatest overhaul of the state in a generation.

"I want to tell Greeks very honestly," he said, "that we have a big trial ahead of us."

While the bailout provides a lifeline to the Greek government, similar challenges lie in wait for Portugal, Spain and perhaps Italy, the other countries on Europe's deficit-wracked southern tier. Moreover, outside the nations that rely on the euro as their common currency, Latvia, Hungary and Romania are all faltering in their own efforts to meet economic and fiscal goals set in conjunction with the I.M.F.

And even Britain, which has its own currency and so far has had little trouble borrowing at reasonable interest rates, will not be able to put off its day of reckoning much longer, analysts say. Whoever takes power after the parliamentary election on May 6 will soon be under intense pressure from the markets to set out a credible plan for closing Britain's huge fiscal gap.

For Europe, the unprecedented bailout of a member of the 16-nation euro zone has tested the credibility of the single currency and created some of the deepest fissures in the European project since its inception more than half a century ago.

For Greece, the rescue package, which is expected to be approved by the Socialist-controlled legislature later this week, will require years of sacrifice.

Finance Minister George Papaconstantinou, who flew to Brussels on Sunday for an emergency meeting of euro-zone finance ministers, said Greece had agreed to raise its value-added tax to 23 percent from 21 percent, to freeze civil servants' wages and to eliminate public sector annual bonuses amounting to two months' pay. Members of Parliament would no longer receive bonuses, either.

He said special rules allowing for early retirement of civil servants would be tightened and that the government intended to increase taxes on fuel, tobacco and alcohol by about 10 percent.

But Mr. Papandreou said that in tough negotiations with the I.M.F., the European Union and the European Central Bank, the government had succeeded in avoiding private-sector salary cuts.

Macduff Everton | Ironica | Getty Images

Mr. Papaconstantinou did not address the critical issue of whether the government would relax rules on laying off public-sector workers, whose generous salaries and benefits have been a key cause of Greek's debt problem. Until now, the government has not been able to lay off civil servants, whose employment rights are in effect constitutionally guaranteed.

Indicating that the measures would inevitably undermine economic growth, Mr. Papaconstantinou forecast a deeper-than-expected recession ahead, with the economy contracting 4 percent in 2010, and shrinking another 2.6 percent in 2011, before returning to growth with 1.1 percent expansion in 2012.

And he conceded that the program, even if as successful as planned, will take longer than originally hoped to restore Greece's fiscal balance. The government now predicts that Greece will not reduce its deficit - about 13.6 percent of the nation's gross domestic product in 2009 - to under 3 percent until 2014, two years later than the earlier target.

"We will be in recession for the next few years, which means that we have to run faster to reduce the deficit," Mr. Papaconstantinou said.

After months in which Germany balked at the prospect of bailing out the euro zone's most profligate members, European leaders have in recent days been racing to complete the package for Greece with newfound urgency, after Standard & Poor's downgraded Greece's debt to junk status.

The bailout amounts to €45 billion this year, followed by more aid in the following two years. In return, Greece has to make budget cuts of €30 billion over the next three years. Mr. Papaconstantinou said the funding from the rescue plan covered a large part of Greek borrowing needs for the next three years.

European Union and I.M.F officials said the bailout plan also included a support fund for domestic banks, which may face an increase in bad loans as the recession deepens.

"The objective of the fund will be to ensure that the Greek banks are well capitalized at all times," Servaas Deroose, deputy director general of the European Commission's economic and financial affairs department, told reporters in Athens.

Poul Thomsen, I.M.F. mission chief for Greece, said the Greek austerity measures should help reassure markets, which had been charging a huge premium to lend to Greece compared to the going rate for German bonds.

Debtor Nations
Debtor Nations

"This is a defining moment for Greece; I think it will restore confidence," he said. "I think you will see a sustained, significant decline of spreads."

Mr. Thomsen dismissed any suggestions that Greece needed to restructure its debt and require its lenders to take a big hit as well. "It has never been discussed, no plans, nothing," he said, adding that the package for Greece was in no way a blueprint for other members of the European Union.

But some economists argued that debt restructuring should not be ruled out as an option for the future. It would reduce the overall debt burden on Greece's economy, but would also create the heavy risk of pushing nervous investors to deny Greece access to the credit markets.

For all the effort that has been put into creating the rescue package, doubts remained whether Greece will be able to follow through on what amounts to a cultural revolution in the social contract between state and citizen.

The shake-up of longstanding aspects of Greek life, from endemic tax evasion to overstaffed offices of idle employees, has prompted fears that widespread social unrest could unhinge a Greek recovery. And while most economists agree that the austerity measures are long overdue, some fear that they could push Greece into an even deeper and prolonged recession, and undermine the political will to follow through on the changes.

Mr. Papandreou in recent days has likened Greece's plight to that of Odysseus, Homer's heroic survivor who took 10 years to return home from war. He has thus far largely escaped blame for a crisis that has been pinned on the profligacy of his predecessors from the center right.

But Yannos Papantoniou, a former finance minister from the ruling Socialist party, said that while Greeks understand the need for sacrifice after years of excessive borrowing by consumers, business and government alike, they will expect to see positive results soon from the cost-cutting measures, particularly if most of the pain is concentrated on the poor and lower middle classes.

"My impression, having managed this type of situation in the 1990s, is that Greeks are not patient people," he said in an interview.

Yiannis Stournaras, a leading economist and former economic adviser to the Socialist party, argued that the close monitoring by the I.M.F. and intense scrutiny by the European Union would prevent the Greek government from deviating from the austerity path.

"The I.M.F. will be here every few months and will be keeping a close eye on Greece's every move," he said. He jokingly conceded that such skepticism is warranted, not just because the previous government lied about the magnitude of Greece's deficits but because the nation has a tradition of deception dating back to ancient times.

"People haven't trusted the Greeks since the time of the Trojan War," he said. "So this is nothing new."

Landon Thomas Jr. reported from London. Stelios Bouras contributed reporting from Athens; James Kanter contributed from Brussels.