Officials weigh expanded bailout package for Greece

By Anthony Faiola and Peter Whoriskey
Washington Post Staff Writer
Thursday, April 29, 2010; A12

LONDON -- Economic leaders in Europe considered a rescue plan for Greece on Wednesday that would more than double the proposed bailout package, to $158 billion, as pressure for action mounted amid signs that debt crisis was spreading to other heavily leveraged European nations.

The credit-rating agency Standard & Poor's lowered its rating of Spain on Wednesday, just a day after doing the same for Portugal and Greece.

With investors increasingly leery of financing those countries' debts, European and International Monetary Fund officials arranging the Greece bailout struggled to reach a consensus about what should be done.

IMF Managing Director Dominique Strauss-Kahn met with German lawmakers in Berlin on Wednesday to discuss the rescue, hoping to persuade them to support a three-year plan that would extend aid to Greece if the country promises fiscal austerity measures.

"Every day that is lost is a day where the situation is getting worse," Strauss-Kahn said. "Not only in Greece, but in the E.U. and also more far away."

European and IMF officials have said that a Greek deal could be done "within days." Strauss-Kahn declined to cite details of the aid package but said that time was running out, as investors have sold off not only Greek bonds in recent days but also those of Spain, Portugal, Italy and Ireland.

Although Greece accounts for less than 3 percent of the European Union's economy, some economists said that the country's turmoil could infect other heavily indebted nations.

"I like to remind people that Thailand was a fairly small country but the Asian crisis had its origin there," said Carmen Reinhart, director of the Center for International Economics at the University of Maryland and a specialist in financial crises.

Others compared the Greece crisis to the collapse of Lehman Brothers and the resulting fears of a domino effect on other financial firms.

"We are becoming increasingly concerned that the crisis in Greece could pose as big a risk to the global economy and financial markets as the collapse of Lehman Brothers did in September 2008," the advisory firm Capital Economics wrote in a note to clients. "The fact that a Greek default is even considered possible is a fundamental shock to confidence in the world order."

The turmoil has driven up the interest rates at which the Greek government can borrow money, creating the risk of a financial death spiral: Higher rates make it harder for the nation to meet its obligations, which in turn causes investors to demand higher rates.

The effective interest rate on a two-year Greek bond neared 16 percent Tuesday, more than 15 percentage points above that for a two-year German bond. The rate on a two-year Portuguese bond was 4.8 percent, up from 1.3 percent six months ago.

But although there appears to be consensus among European nations that they should aid Greece, the size of the bailout and the magnitude of the reforms of the Greek economy remain a matter of debate.

Late last week, officials were considering a $60 billion aid package, but investors essentially voted that down Monday, selling off Greek bonds. This week, European and IMF officials are weighing a rescue that could top $158 billion.

Such an enormous bailout could stall or prevent a Greek default, giving Athens time to rebuild its economy, slash spending and overhaul its broken tax system without having to rely on global financial markets.

The prospect of a bigger rescue was enough to mute the market panic Wednesday. But if Greece cannot secure an international rescue, the nation could be two weeks away from a default -- or an admission to the government's creditors that it can't repay borrowed funds. By May 19, the country must refinance more than $11 billion in debt.

The focus of the bailout negotiations has been Germany, which is expected to shoulder the largest share in the rescue, despite public hostility toward the package.

President Obama and German Chancellor Angela Merkel talked about the matter by phone Wednesday. "They discussed the importance of resolute action by Greece and timely support from the IMF and Europe to address Greece's economic difficulties," the White House said in a statement.

Initially, Germany, the single largest economy in Europe, was being asked contribute roughly $11 billion. But that figure appears set to rise closer to $33 billion and is coming just as the nation is gearing up for regional elections.

"It has become clear in the past few hours that Greece needs 120 billion euros," Franz Schaeffler, a lawmaker from Merkel's coalition, said in a phone interview. "I think it is a bad idea, and I haven't decided whether to vote against it yet," Schaeffler said. "I think it's time to tell Greece it would be good if they leave the eurozone."

German Finance Minister Wolfgang Schaueble told reporters that political leaders were coming together on the package.

Whoriskey reported from Washington. Special correspondent Jabeen Bhatti contributed to this report from Berlin.

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