15th Aug 2022

Greek turmoil raises prospect of imminent bail-out

Fresh doubts over Greece's ability to meet upcoming debt obligations resulted in record high borrowing costs for the country on Thursday (8 April), ravaging stocks and leading analysts to suggest now was the time to call in EU/IMF support.

"It is now up to the Greek government to go publicly to the EU and IMF and ask for the cash and the support; the matter cannot be long delayed," said Chris Pryce, a senior analyst with Fitch ratings agency, reports Reuters.

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  • Greek stocks tumbled on Thursday (Photo: Katrina.Tuliao)

"Despite everything the EU and the eurozone have done there is still a lack of clarity [and] confusion about what they intend to do, when they intend do it and how much would be involved."

Greek bond prices dropped for a seventh day in a row, driving up the yield on the 10-year security to 7.5 percent, a euro area record of 4.5 percent above the benchmark German Bund.

In a referendum last month, Icelanders rejected the terms of a UK/Dutch offer to payback money lost by savers in the collapsed Icesave account, saying the 5.5 percent rate being demanded was exorbitant.

Estimates put the borrowing needs of Greek Prime Minister George Papandreou's government at roughly €11.6 billion from now to the end of May, with Athens set to auction a batch of 12-month Treasury bills next Tuesday in a crucial test of its capacity to raise funds.

The centre-left Pasok administration has so far held off from taking the bail-out plunge however, despite the growing clamour of calls this week for Greece to tap the EU/IMF support mechanism agreed by EU leaders in Brussels before Easter.

"We do not need to activate or modify any mechanism," Greek government spokesman George Petalotis told a news briefing on Thursday.

Speculation that Athens was having second thoughts about IMF involvement prompted fresh market concerns at the start of the week, adding to doubts over how the support mechanism would actually be triggered and what interest rates lenders would offer.

The recent eurozone leaders' agreement, based almost entirely on an earlier Franco-German text and largely dominated by German demands, stipulates that any EU/IMF support should only come as a last resort, adding that interest rates will be "non-concessional, i.e. not contain any subsidy element."

"Any disbursement on the bilateral loans would be decided by the euro area member states by unanimity subject to strong conditionality and based on an assessment by the European Commission and the European Central Bank," continues the statement.

Speaking after the monthly meeting of the ECB's governing board on Thursday, the bank's president Jean-Claude Trichet sought to allay market jitters, referring to the EU/IMF mechanism as a "very serious commitment" which "nobody should take lightly."

Mr Trichet suggested to journalists that the interest rate charged on loans to Athens could be similar to the rates at which other eurozone governments borrow themselves.

The comments could prove controversial with the government of Angela Merkel however, with Berlin desperate not to be seen as propping up an errant euro area member, a move that analysts say could prompt a German constitutional challenge.

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