Greece prepares for emergency loan
European and IMF officials to start talks with Greece on technical details of a possible €45bn loan package.
The Greek government today (15 April) moved a step closer to requesting activation of a €45 billion emergency loan facility from the eurozone and International Monetary Fund (IMF), by requesting technical discussions on the conditions that would be attached to aid.
Greece sent a letter to the European Commission, IMF and European Central Bank, requesting discussions on a “multi-year programme of economic policies…that could be supported with financial assistance”.
The Greek government made clear, however, that it was not yet asking for aid.
The Commission and the IMF responded by saying that they would send officials to Athens to begin technical discussions with the Greek government on Monday (19 April).
Dominique Strauss-Kahn, the managing director of the IMF, said that the discussions in Athens would focus on “policies that could provide the basis for financial assistance”.
“The Greek decision to initiate fund programme engagement is consistent with the agreement among European leaders last weekend that financial support from members of the euro area should go hand-in-hand with IMF engagement and financial assistance,” Strauss-Kahn said.
Interest rates charged by investors on Greek sovereign debt reached record levels last week, prompting finance ministers from the 16 countries that use the eurozone to hold an emergency teleconference on Sunday (11 April) to hammer out details of how financial support could be provided to Greece’s struggling economy.
The finance ministers agreed that, should Greece seek financial help, they would provide co-ordinated loans at a fixed interest rate. The rate on a three-year fixed-rate loan granted on 5 April would have been around 5%.
Fact File
7%
The yield on Greek bonds in trading on 14 April.
Eurozone governments agreed to provide up to €30bn to Greece in the first year of support, and left open the amount that could be provided in future years. Officials said that all governments indicated during the teleconference that they would be willing to provide support to Greece this year. The money would be provided as part of a joint programme with the IMF, which is expected to provide around €15bn this year, at significantly lower interest rates than those charged by the eurozone.
An IMF official said that Greece’s letter gave the IMF the mandate it needed to negotiate the details of how its part of the joint programme would work. The IMF can only define lending conditions once a country has made a request for discussions on possible support, she said.
Yields on Greek bonds have risen sharply since the start of the week, as investors have grown sceptical about whether the eurozone/IMF plan can save Greece from default. The markets are concerned, for example, that the facility would be difficult to activate because the granting of loans would be contingent on approval by parliaments in several countries, notably Germany.
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Yields on Greek 10-year bonds rose above 7% yesterday, and continued to rise today to 7.38%, close to the record 7.5% reached last week and over 400 basis points higher than the rate on German bonds, the benchmark for the eurozone. The increase in yields has increased speculation that Greek will have to call on the emergency loan facility.
The issue was expected to dominate discussions at an EU finance ministers meeting starting tomorrow in Madrid, but the closure of airports in northern Europe as a result of a volcanic eruption in Iceland have put the meeting in doubt.