Greece still under siege despite aid pledge

ATHENS, Greece (AP) — Help is on the way for debt-stricken Greece, but fears of an eventual financial disaster still haunt the country and the rest of the 16-nation eurozone.

A euro45-billion bailout package from other eurozone countries and the International Monetary Fund should see Greece through its borrowing needs for this year. But the bailout is complicated by German grumbling, which continued Monday, about the burden of the bailout on its own finances.

More than that, bond markets are still flashing warning lights that someday Greece might say it can't pay — and announce a restructuring or default.

That kind of collapse wouldn't be unprecedented — it notably occurred in both Argentina and Russia in 2001 and 1998 — but could spread the debt crisis to other troubled eurozone countries such as Portugal, Spain and Ireland. That could make lenders even more reluctant, bringing higher borrowing costs for governments that would crimp what they can do for people across Europe for years to come.

A key indicator — the interest rate gap, or spread, between Greek and benchmark German 10-year bonds trading on financial markets — jumped to a record 6.5 percentage points Monday, the first day of markets opening after Athens asked for the eurozone-IMF rescue to be activated on Friday.

The gap translates into an interest rate approaching 10 percent if the government were to try to raise money on the markets — three times what economic powerhouse Germany pays. Squirming between a massive budget deficit and a euro300 billion public debt, the spiraling borrowing costs forced Athens on Friday to request the rescue package.

Finance Minister George Papaconstantinou said he expected the IMF board would approve its portion of the loan support — around a quarter of the total — in the first 10 days of May. If some European parliaments were delayed in approving their contributions, the IMF support could be used to obtain bridge financing from other sources.

The government is already implementing a harsh austerity program that cuts civil servants' wages, increases taxes and freezes pensions. While the reforms have triggered strikes and protests, they have been relatively muted so far by Greek standards, although that situation could change if deeper cuts are introduced.

The question is, can Greece cut enough to restore investor confidence?

Jeremy Batstone-Carr, head of private equity research at Charles Stanley stockbrockers in London, thinks restructuring is inevitable and represents a lesser evil than default. "Greece is hoping to bridge its financing gap for little more than a year," he said in a research note. "Unless a solution emerges to address the financial markets' obvious uncertainty regarding the crisis, the Greek government will be back, cap in hand, begging for further financing."

The bailout "solves nothing. Either existing debt is restructured or Greece defaults, it really is as simple as that."

But Michael Massourakis, chief economist at Alpha Bank in Athens, says Greece has more fat it can cut to restore its finances. "There is a lot of structural reform, privatization, deregulation still in the pipeline to happen, and all these things can turn around the situation dramatically," he said.

"So I don't think Greece is in a situation where debt restructuring is an issue, simply because there is a lot of room to be covered simply in terms of genuine adjustment."

Market jitters have been fueled by the stance of Germany, which would be the largest contributor to the eurozone-IMF rescue package with euro8.37 billion but which has been reluctant to bail out a country that has spent beyond its means for years.

The German government has committed to putting the issue through parliament, but Chancellor Angela Merkel faces a crucial regional election in North Rhine-Westphalia, its most populous state, on May 9 and appears reluctant to move on the Greek bailout before then.

Merkel said Monday that Athens must be prepared to accept more tough measures "not just for one year, but for many years" to bring its finances into order.

"It is important that Greece now makes clear in a believable way that it is willing to go down a path of sustainable development to gain back its financial and economic power," she said in Berlin. "We need a positive development in Greece, connected with further austerity measures."

"If that can be negotiated, and when it is clear that there are no other alternatives ... then Germany will of course take the necessary parliamentary steps."

German Finance Minister Wolfgang Schaeuble said Berlin wouldn't take up Athens' aid request until Greece completes talks with the EU and IMF on the details of the package and further austerity measures.

The continued uncertainty as to exactly when Greece might see the first concrete aid — it has euro8.5 billion worth of a 10-year bond maturing on May 19 — sends its borrowing costs to new heights each day.

The situation has also annoyed other EU countries, notably France, whose President Nicolas Sarkozy has repeatedly stressed that eurozone countries must ensure the stability of their common currency.

Sarkozy issued a joint statement Monday with European Commission President Jose Manuel Barroso calling for "rapid and resolute action against speculation that targets Greece to ensure the stability of the euro zone,"

In Italy, Foreign Minister Franco Frattini urged Germany to move ahead.

"I'm worried about a certain inflexibility that Germany has shown, but on the other hand it's necessary for Greece to take a credible step," Frattini said in Luxembourg, according to the ANSA news agency.

"From our point of view, we mustn't have doubts," Frattini said. "If the common house is in difficulty, we must save the walls because we are all in this common house together."


Associated Press writers Nicholas Paphitis, Nathalie Rendevski Savaricas and Derek Gatopoulos in Athens, Angela Charlton in Paris, Juergen Baetz in Berlin and Alessandra Rizzo in Rome contributed.