BUSINESS STRATEGY – Describing his country’s economy as “a sinking ship,” Greece’s prime minister formally requested an international bailout on Friday, creating the biggest test so far to the European monetary union.
“We drew up a plan, we took difficult and painful measures,” Prime Minister George A. Papandreou said in a nationally televised address. “But the markets did not respond.”
Greece was forced to make the request after investors shunned the country’s bond offerings because of concern about its runaway debt. Those worries intensified Thursday when the European statistics agency raised its estimate for Greece’s debt above the government’s most recent figures, pushing the yield on Greek bonds to nearly 9 percent.
At that point, the need for international funds seemed a certainty, and Mr. Papandreou made the request while on a visit to Kastellorizo, an island in the Aegean Sea.
The financing will come from an emergency aid package arranged two weeks ago in Brussels in which Greece’s euro zone partners pledged up to 30 billion euros ($40 billion) in loans to Greece. The International Monetary Fund is expected to provide an additional 15 billion euros.
Markets did not react significantly to the announcement because investors had already factored in an expectation that Greece would seek the financing.
The prospects of a Greek bailout has strained the solidarity of the euro zone — the 16 countries that use the euro — with strong resistance coming from some countries, especially Germany. It has also raised concern that other struggling economies, like Spain and Portugal, might need a financial rescue.
“At some stage the euro area will arrive at a fork in the road,” said Gerard Lyons, chief economist at Standard Chartered Bank in London, “as some economies are structurally different to others.”
For Greece, the request for aid is likely to mean a deeper level of economic pain at home. It has few options for fueling growth, and will probably have to impose even deeper austerity measures than the ones that have already caused widespread protests by unions. The I.M.F. is almost certain to demand even greater deficit cuts. Read more »
