THE EUROPEAN authorities and the IMF are working to agree austerity measures with the Greek government by the weekend, clearing a key obstacle to the release of emergency loans to the country.
As German backing for the rescue lifted the euro yesterday and eased pressure on Greek financing costs, informed sources said EU and IMF officials planned to take advantage of the weekend closure of markets to release details of the plan to gain control over Greece’s deficit.
Although severe budget cuts already in force have prompted a series of massive public protests in Athens and in other Greek cities, prime minister George Papandreou looks set to agree to execute the new austerity plan to secure the activation of the rescue.
Mr Papandreou pledged last night to do what was necessary.
“The immediate urgent measures are a strong bridge for us to pass to major changes. We will do what is needed for the salvation of the country,” he told an audience of business leaders.
EU officials are making tentative plans for a special summit of the leaders of the 16 euro group countries this day week in Brussels.
The objective is that they would sanction the loans at the summit, giving Greece a little more than one week to collect the €8.5 billion that falls due on May 19th.
However, this timetable could prove difficult for German chancellor Angela Merkel as it means she would face a key regional election on Sunday week having signed up for the rescue.
Most Germans oppose any rescue, and Dr Merkel risks losing her power to enact legislation in the upper house of parliament if the vote in North Rhine-Westphalia goes against her.
She was spurred to call for an acceleration of the talks on Wednesday by an unexpected credit downgrading of Spain by rating agents in Standard Poor’s.
The cut, which fanned fear of contagion risk spreading from Greece to other debt-reliant euro members, came one day after SP downgraded Portugal.
Lisbon responded yesterday, with finance minister Fernando Teixeira dos Santos saying the government was ready to adopt further austerity measures if necessary. “Without wanting to make any commitment right now, we may have conditions that make the final result better than the one we have proposed,” he said after a cabinet meeting.
Dr Merkel’s call for a speedy resolution of the Greek talks provided a measure of relief to markets, although the austerity plan and the associated credit line will be heavily scrutinised by analysts and investors for any weakness.
EU economics commissioner Olli Rehn said the EU executive, the European Central Bank and the IMF would conclude the talks “in the next days”.
“The outcome will be a multi-annual programme that will lead to major fiscal and also structural adjustment,” he told reporters.
“The financial support will give Greece a sufficient breathing space from the pressures of the financial markets to decisively restore the sustainability of its public finances and to put the economy back on a path of sustainable growth.”
Some €45 billion would be made available in the first year of the plan; €30 billion from euro countries and about €15 billion from the IMF.
It was suggested a fortnight ago that the three-year package would be worth €80 billion. However, IMF managing director Dominique Strauss-Kahn has told German parliamentarians that the final sum was more likely to be in the order of €120 billion – and some reports yesterday suggested it might reach as high as €135 billion.
While uncertainty over the size and timing of the rescue has weighed on markets for weeks, the euro rebounded from one-year lows yesterday to trade up 0.1 per cent against the dollar at $1.3224 and touched $1.328 at one point.
Risk premiums also eased, but remained at penal levels.
The yield on Greek two-year notes dropped 3.22 percentage points to 13.75 per cent. The difference between the price of German and Greek 10-year bonds, a key measure of market sentiment, declined to less than 6 percentage points from more than 8 points.
Financing costs on Irish, Italian, Spanish and Portuguese paper also improved.
