By Anthony Faiola and Peter Whoriskey
Monday, May 3, 2010; A01
LONDON -- Greece on Sunday announced a long-awaited deal with the European Union and International Monetary Fund for a $145 billion financial rescue, an unprecedented package aimed at preventing a far broader debt crisis from engulfing other nations in Europe.
The agreement is a financial lifeline for a country staggered by repeated budget deficits and economic malaise. In exchange for the loan, Greek government officials have promised to continue an array of reform measures that, among other things, already have cut pensions and raised taxes.
Greek Prime Minister George Papandreou is leading the effort to sell the austerity measures to his constituents, seeking to overcome opponents who unleashed a violent public backlash over the weekend, as tens of thousands of protesters took to the streets.
"I have done and will always do whatever it takes for the country not to go bankrupt," Papandreou said in a somber televised address on Sunday. "I know that with the decisions today, our citizens must suffer greater sacrifices. The alternative, however, would be catastrophe and greater suffering for us all."
It is the first time the nations that use the euro will come to the aid of one of their own since the creation of Europe's principal currency 11 years ago. The bailout aims to stave off the possibility, raised by economists and investors, that Greece's troubles could in turn spook investors in Portugal, Spain and Italy, preventing national governments from being able to repay their debts and spreading a financial contagion that could stifle the European economy for years. The three-year package is also the largest international rescue to be backed by the IMF.
It remains far from certain whether the bailout will work. Facing violent protests at home, Greece may yet be forced to roll back spending cuts, unraveling the deal. Also, bailing out Greece alone may not be enough. In past economic crises in Asia and Latin America, for instance, the IMF ultimately was forced to rescue not one but several nations in order to restore investor confidence.
Officials strongly deny the need for aid elsewhere, but the finances of European nations and other developed countries are by some measures in the worst shape since World War II, as many governments increased spending and saw tax collection drop in the wake of the global economic crisis.
In recent months, panicked investors have been driving up borrowing costs for financially troubled Portugal and, more prominently, Spain, the fourth largest economy in continental Europe. Greece's troubles have also roiled U.S. markets and cast a pall over the budding economic recovery.
If conditions worsen, some analysts think, the IMF and E.U. may be forced to offer financial lifelines to Spain and Portugal. But with Greece's bailout already unpopular in countries such as Germany that are largely footing the bill, further bailouts could prove politically impossible.
Debt loads are now so high that even bastions of stability such as Britain are under close watch, with analysts saying it must begin to trim its whopping deficit to shore up long-term investor confidence. Cutting the deficit and avoiding a Greek-like crisis has emerged as a major issue in this week's British elections.
The proposed cuts in Greece include a new round of reductions in salaries for state workers, more flexibility to fire them, an increase in the value-added tax from 21 percent to 23 percent, and higher taxes on fuel, tobacco and alcohol. More state-run industries are expected to be privatized, and military spending will be slashed.
The government is preparing to submit special legislation to Parliament that would move the agreement forward; it is expected to approve the measures by Friday. A top E.U. official said Sunday that the group was activating the bailout funds and that Greece would receive the first payment by May 19, when part of its debt comes due.
Papandreou bluntly warned Greeks to prepare for the fiscal pain, particularly as the government seeks to restructure a broken tax system plagued by rampant evasion. President Obama spoke with Papandreou on Sunday afternoon, the White House said, and expressed support for the bailout.
Protesters including unionists and left-wing advocates took to the streets of Athens over the weekend, throwing gas bombs, clashing with police, and calling for the Greek government to default on its debt obligations to investors. As they marched, they shouted slogans against the E.U. and the IMF, according to reports from Athens. The protests underscored the political difficulty Greece faces in making good on its pledges.
The main opposition group in Parliament, the conservative New Democracy Party, has been fiercely critical of the proposed cuts.
"This is an even heavier dose of the medicine that got us here in the first in place and could kill the patient," party leader Antonis Samaras said in a televised statement.
But the Greek government was coming under pressure from many sides, including from some of its European lenders, who questioned whether Greece should be rescued at all. The political debate has been particularly intense in Germany, which is poised to deliver the largest share of the bailout.
With German public opinion running against the bailout, Chancellor Angela Merkel has come under criticism. One editorial in Germany's Bild newspaper said "most Germans struggle to understand why they should be paying for the Greeks, who are broke because they squandered their money."
Opposition to the bailout is such that Merkel's popularity has suffered, polls show. Although it remains politically difficult to win approval of a bailout in Parliament, she and other high-ranking politicians appear to be securing grudging support for a plan, given that a financial collapse in Greece could generate a crisis for the euro, which Germany also uses.
Ultimately, the European and IMF officials who have organized the bailout may be judged on whether Greece recovers and pays back the loans or stumbles and winds up defaulting on its debt. The two principal ideas behind the reforms are to slash the country's budget deficits and to make Greece more competitive globally, officials said.
In 2009, the budget deficit stood at 13.6 percent of its gross domestic product. Overall debt was 115 percent of GDP. To shrink those burdens, government wages and social benefits, which represent 75 percent of total public spending, must be cut, the IMF said. The reform plan calls for shrinking the annual budget deficit to 3 percent of GDP by 2014.
"This is a defining moment for Greece," said Poul Thomsen, IMF mission chief for Greece. "What the government has committed to is a tough, front-loaded program that will correct things for the future."
Whoriskey reported from Washington.