28th Oct 2016

Rehn: No other state will need a bail-out

  • Olli Rehn took over the commission's economy job in February (Photo: European Commission)

The European Commission has upwardly revised its 2010 growth forecast for the EU, but warned that governments must clean up their public finances in order to prevent ongoing market turmoil from halting the bloc's modest economic recovery.

Presenting the commission's Spring Economic Forecast on Wednesday (5 May), economy commissioner Olli Rehn also conceded that the recently agreed €110 billion bail-out package for Greece will only suffice if Athens returns to capital markets for borrowing in 2012.

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"We assume that Greece will gradually be able to return to the financial markets, but in 2012 we will still cover part of Greece's needs," he told journalists in Brussels.

Analysts say that a successful return to capital markets in 2012 is not a foregone conclusion however, even if the government manages to implement the tough package of savings measures recently agreed with the IMF, the European Commission and the European Central Bank.

Rising debt levels and the possibility of a debt restructuring are two things that could continue to affect market sentiment, keeping bond yields high.

"Greek debt levels will continue to increase for several years despite the austerity measures," Marcel Thieliant, a research analyst with Credit Suisse told EUobserver. "Likewise, debt restructuring is a risk that will remain in place for quite a long time, perhaps as much as a decade."

Mr Rehn categorically denied that other eurozone states might need to call on similar financial support, after Spanish stocks fell sharply on Tuesday amid market rumours Madrid was preparing an aid request. Experts say any bail-out for Spain would be highly problematic, with the county's debt total roughly twice the size of the one held by Greece.

"Greece is indeed a unique and particular case in the EU," Mr Rehn said. "Greece has had particularly precarious debt dynamics and Greece is the only member state that cheated with its statistics for years and years."

Portugal is also looking increasingly vulnerable however, with credit rating agency Moody's on Wednesday putting the country's government bond ratings on review for a possible downgrade.

The centre-left administration in Athens was forced to call on financial assistance last month after rising borrowing costs on capital markets eventually became unsustainable. Investors have increasingly questioned the Greek government's ability to pay back bond holders, as the country labours under a roughly €300 billion debt pile and a budget deficit that reached 13.6 percent last year.

The joint eurozone-IMF loan approved last Sunday is intended to run over three years (2010-2012), and comes on condition that Athens implements a tough package of austerity measures to bring its deficit down.

Mr Rehn dismissed doubts over Slovakia's continued support for the deal which will see euro area states contribute a portion of the loan according to their economic size, despite recent tough rhetoric from the country's election-mode prime minister, Robert Fico. "I have no doubt that Slovakia will stick to its commitments," said Mr Rehn.

Euro area leaders are meeting in Brussels this Friday to assess the level of progress in obtaining parliamentary approval for the Greek loans, a necessary procedure in a number of member states, with all eyes of Friday's prior vote in the German parliament.

Improved forecast

The latest commission analysis forecasts overall EU growth of 1 percent for 2010, up a quarter of a percent on the institution's autumn forecast last year. EU growth for 2011 is now expected to hit 1.7 percent, still modest compared to pre-crisis levels.

An improved global outlook, in particular in the area of trade, is the chief factor behind the upward revision.

"Stronger-than-expected external demand, particularly from emerging economies ...has boosted EU exports," says the report. "The outlook for global trade in 2010 is much more favourable than it was last autumn."

Ironically, eurozone financial turmoil emanating from Greece's debt crisis has proven to be a boon for the bloc's exporters due to the falling value of the euro. On Tuesday the single currency slumped to a one-year low against the dollar.

Germany's export-driven economy has benefited in particular from the euro's slide, with recent business indicators pointing to rising confidence in Europe's largest economy.

Despite some signs of improvement on the employment front, Europe's labour market is expected to contract by a further 1 percent this year, stabilising at around 10 percent before rising again slowly in 2011.

Stimulus measures, implemented in the face of last year's global economic downturn, have led to a tripling of EU government deficits on 2008 levels warns the commission report however, while increased levels of public debt will be the "longest lasting legacy of the crisis".

Greece heads up the list with a forecast debt pile of 124.9 percent of GDP in 2010, compared to Estonia on 9.6 percent. Estonia is expected to secure commission approval next week to become the seventeenth member of the euro area, with 1 January 2011 the likely entry date.

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