Greece's draconian austerity measures announced yesterday (3 March) may pave the way for European Union government aid, easing fears that Greece could lose its ability to borrow from debt markets at affordable rates.
Greece targeted civil servants, the rich and the church on Wednesday in a sweeping new 4.8 billion euro ($6.5 billion) austerity programme designed to secure European help to tackle its crippling debt burden.
The plan was welcomed by the markets and set the scene for crucial European support that analysts say could come soon.
But German Chancellor Angela Merkel, whose backing for any European safety net for Greek borrowing would be vital, stopped short of any commitment to financial support.
The government said the public sector pay cuts, pensions freeze and tax increases would save the equivalent of 2% of gross domestic product on top of existing plans to reduce this year's budget deficit to 8.7% of GDP from 12.7% in 2009.
Prime Minister George Papandreou noted the deep cuts, which drew howls of protest from trade unions, were essential to save the country and the ball was now in Europe's court.
"We are now justifiably expecting EU solidarity, which is the other side of this agreement," he said in a televised conversation with President Karolos Papoulias. "Europe's responsibility is historic."
But Merkel cold-shouldered Greek and market expectations of tangible assistance, saying she would not offer aid when she meets Papandreou in Berlin on Friday.
"I want to say clearly that it is not about aid measures for Greece on Friday but about good relations between Germany and Greece," Merkel said, adding there was no alternative to Greece "doing its own homework".
What kind of bailout?
Although the EU treaty seeks to prevent bailouts of member states, legal issues could be overcome with enough political will.
EU governments could offer many forms of aid, from speeding disbursement of structural economic aid to giving debt guarantees or creating a bailout fund.
Because aid would have to be justified to taxpayers in rich EU states, it is unlikely to involve government-to-government transfers of cash. Instead, it would probably be indirect and designed to help Greece continue to borrow in debt markets.
Sources familiar with governments' deliberations have said, for example, that state-run banks such as Germany's KfW and France's Caisse des Depots might buy Greek bonds or extend guarantees for other banks to do so.
German and French media reports have said governments in the 16-country euro zone might offer aid worth a total of 20 to 25 billion euros ($27 billion to $34 billion). Officials have declined to comment on the size of any aid plan.
Greece ready to ask IMF for help
Meanwhile, the International Monetary Fund welcomed Greece's "very strong" fiscal package to contain its massive debt crisis, saying implementing the austerity measures would be critical.
“The authorities have put together a very strong fiscal package for 2010. The implementation of the fiscal program will be a crucial step forward in a multi-year process," IMF spokeswoman Caroline Atkinson said in a statement.
The IMF also called on the Greek authorities "to develop and implement soon significant reforms to boost productivity and growth".
"We stand ready to support the implementation of the authorities' plans by sharing our technical expertise in these matters," Atkinson said.
In Athens, Papandreou conceded his debt-ridden country would go to the IMF "as a last resort" if European partners fail to provide practical support after deep spending cuts.
(EurActiv with Reuters.)