Package likely to test stability of the euro
GREECE bowed to market pressure yesterday and formally requested a bailout from the European Union and the International Monetary Fund (IMF).
It is the first time a eurozone member has asked for a financial rescue and it is likely to test European political cohesion as well as the stability of the euro itself.
Greece asked for the €45bn package after being downgraded by the Moody's credit rating agency on Thursday. That sparked another collapse in Greek government bonds -- potentially pushing the country's borrowing costs to astronomic levels.
George Papandreou, the prime minister, announced that he was seeking help in a live broadcast from the remote Aegean island of Kastelorizo.
"This is the moment," he said. "The time that was not granted to us by the markets will be given to us by the support of the eurozone. It is a national and imperative need to officially ask our partners in the EU for the activation of the support mechanism we jointly created. This should send a strong message that Europe will protect its common interests and currency."
Citing ancient mythology, Mr Papandreou admitted that seeking aid was "a new odyssey for Greece" but it was necessary because the crisis threatened to demolish the sacrifices of the Greek people. "But we know the road to Ithaca and have charted the waters. We have in front of us a journey demanding a common will from us all so we can arrive there safe, proud and with a sense of justice."
Greece, whose national debt stands at €300bn, must refinance about €11bn of its borrowing next month, and €39bn over the next year. It is expected to seek up to €30bn from the eurozone and €15bn from the IMF.
It had hoped to put off making a formal request for aid until George Papaconstantinou, the Finance Minister, had seen Dominique Strauss-Kahn, the IMF's managing director, this weekend.
However, Thursday's downgrade is understood to have forced Mr Papandreou's hand. Greek officials were briefing yesterday that it was obvious the markets were betting that the country would go bankrupt.
Market reaction to the appeal for aid was initially favourable, with the euro rising to as much as $1.3346, having sunk earlier to $1.3202. Meanwhile, the cost of insuring against a Greek government default fell briefly before increasing again.
The cost of insuring €10m of five-year Greek bonds, which hit €650,000 on Thursday, slipped immediately after the announcement to €570,000, but later nudged back up to €600,000.
On bond markets, Greek borrowing costs slipped slightly, with the yield on 10-year bonds falling to 8.346pc, having hit 9.374pc overnight. Later they rose to 8.95pc. But the yield on five-year bonds climbed.
Gavan Nolan, vice-president of credit research at the financial information services company Markit, said: "Activation of the bailout has failed to placate the markets. Uncertainties surround the implementation of the mechanism." He added that the markets were betting that Portugal would be the next nation to which the "contagion" would spread.
Lena Komileva, head of G7 market economics at the Tullett Prebon brokerage, said: "Greece's credit crisis is not over yet. Furthermore, this crisis has moved beyond being just a Greek crisis. It is a sovereign risk crisis stemming from the collapse of the traditional G7 growth model of high indebtedness and a low share of exports in the economy, which affects not just Greece but also countries such as Spain, Italy, the UK and the US."
Diplomatic sources said that the Greek request for aid would test the unity of eurozone countries as never before. In Germany, where public opinion is strongly against a rescue of Greece, parliamentary approval will be required for any loan. Michael Offer, a German Finance Ministry spokesman, said: "In Germany, we are required to act out of solidarity and we will do that in order to stabilise the euro."
Mr Strauss-Kahn said: "We are prepared to move expeditiously on this request." (© The Times, London)