World leaders scramble to negotiate $60 billion rescue plan for Greece

By Anthony Faiola and Howard Schneider
Washington Post Staff Writer
Saturday, April 24, 2010; A01

LONDON -- European and International Monetary Fund negotiators were racing Friday to hash out a $60 billion rescue package for Greece after its prime minister, who called his country a "sinking ship," put out an urgent call for help to prevent a national default.

In making the appeal, Greek Prime Minister George Papandreou dropped his long-standing resistance to an international bailout. But the pending rescue was not enough to calm investors' fears of an economic collapse that could spread to other heavily indebted nations.

Although Greek bonds strengthened after the announcement, they fizzled by late Friday, showing that investors remain skeptical that Athens would adhere to the conditions of a bailout, which sources close to the talks said could include deeper cuts in public pensions and the privatizing of Greek railroads.

The doubts about Greece also spread on Friday to Portugal, Spain and other financially troubled European nations, putting their bonds under pressure and underscoring how concerns over national indebtedness have replaced the banking crisis as the primary problem in the global economy. A default in Greece could also ripple across the Atlantic, hitting banks and pension funds holding Greek bonds and heightening investor worries about the national debt of the United States.

Papandreou's desperate request tees up the biggest test of European solidarity in years, with Greece asking its neighbors to bail it out after a decade of overspending, rampant tax evasion and fudging of government books.

"The moment has come," Papandreou said in nationally televised remarks while visiting the Aegean island of Kastelorizo. "Today, the situation in the markets threatens to deconstruct not only the sacrifices of the Greek people but also the smooth course of the economy."

The rescue plan, which entails 15 European nations contributing $42 billion and the IMF about $18 billion, could give Greece breathing room while it tries to restore market confidence.

Sources familiar with the talks said the IMF could extend a three-year aid program to Greece, with a formal agreement expected within two weeks. Cash disbursals could be accelerated because of immediate need.

The European program would be larger in size, with an agreement anticipated in the coming days. The European funds, however, could take longer to deliver because the European parliaments would still have to approve the deal.

'Sense of urgency'

Although the United States is not offering direct funds, it is the most powerful player in the IMF. Treasury Secretary Timothy F. Geithner told reporters covering G-20 meetings in Washington that he was encouraged by the latest announcement from Europe.

"I very much welcome the greater sense of urgency we're seeing, and I want to encourage the Greek authorities, the Europeans and the IMF to move quickly to put in place a package of strong economic reforms . . . [and] financial support," Geithner said.

French Finance Minister Christine Lagarde told reporters in Washington that officials were "expecting acceleration" of the negotiations and that "significant" progress would be made in the "next few hours or days."

Papandreou's request came as international investors have lost faith in Greece, treating it like a high-risk debtor by charging exorbitant interest rates for the cash it needs to keep its government running. Capital flight in recent weeks has also threatened to undermine the banking system in Athens.

Lies about the deficit

The Greek crisis was touched off last September, after the new Socialist government revealed that its predecessors had lied about the extent of the public deficit, reporting that it was actually 12.7 percent of Greece's gross domestic product. On Thursday, the European statistical office said the budget gap was even larger, about 13.6 percent, triggering a renewed sell-off of Greek bonds.

Greece has already made several rounds of austerity cuts, raising taxes and slashing some state salaries, prompting violent national strikes. But putting Greece's finances in order requires an entire retooling of its tax codes and economy, privatizing industries and reducing its public sector. The country's national debt is now so high that interest payments alone account for 15 percent of all revenue the government takes in.

If Greece proves unwilling to make more painful cuts -- or if bickering in Europe delays aid -- Athens could still default on a portion of its $300 billion debt. That could mean investors are forced to settle for only a small fraction of what they are owed. This, in turn, could bring about Greece's expulsion from the group of European countries using the common euro currency and potentially damage its economy even more.

"There are plenty of examples of countries like Greece that have been able to withstand this kind of pain," said Sarah Carlson, Moody's lead analyst for Greece, citing Turkey and other nations that have made difficult cuts to restore market confidence. "It is a political decision that a country needs to make."

Safeguarding the euro

European leaders, seeking to keep the euro from plunging, pledged last month to aid Greece, but only as a last resort, in the hope that that would be enough to calm investors. But now that their offer is being called in, leaders in Berlin, Paris and Rome were scrambling Friday to sell the rescue to a skeptical public.

In Germany, Chancellor Angela Merkel was confronting the challenge of winning parliamentary approval for a contribution of 8 billion euros, or about $10.7 billion. Germany is Europe's largest economy and would shoulder the biggest single share of the bailout.

Merkel spoke to Papandreou by phone, telling reporters afterward that Greece would have to put together a convincing and credible plan to deal with its situation before the European Union would approve a bailout.

"Greece has to ensure that it does everything in its power to put its finances in order," Merkel said. "The stability of the euro is our top priority, and their plan has to be credible."

But stiff political opposition to the plan in Germany was beginning to break down. Frank Schaeffler of the Free Democrats, a member of Merkel's coalition who has fiercely opposed a bailout, said he recognized that Berlin might have to act. He said the German economy was at stake. German banks and pension funds are the biggest foreign holders of Greek bonds.

Schneider reported from Washington. Staff writers Renae Merle and Peter Whoriskey in Washington and special correspondent Jabeen Bhatti in Berlin contributed to this report.

© 2010 The Washington Post Company