German intransigence over bailing out Greece has raised the chances that the debt-laden country will be forced to turn to the International Monetary Fund for assistance, possibly by the end of this week, in an embarrassing setback for European political union.
Greece has around 20 billion euros ($27.1 billion) of debt maturing over the next couple of months and the last thing it wants is to pay sky-high premiums to get support in the international bond markets. But an unusually public spat between EU officials and German Chancellor Angela Merkel over how to help Greece has kept investors on edge ahead of an EU leaders' meeting Thursday.
"A crisis that began over Greece's borrowing costs is now metamorphosing into a more serious threat to the political and economic order in Europe as a whole," said Stephen Lewis, chief economist at Monument Securities in London.
EU governments said last week they would provide Greece with some form of support, possibly bilateral loans, should it be needed. Greece says it does not need a direct cash infusion, but concrete measures that will convince markets it will not be allowed to default. That would lower its costs to raise money.
In the past few days, however, Germany has been dashing those hopes — and raising the possibility that the IMF be involved.
Merkel said Sunday that EU leaders should not discuss a bailout plan at the March 25-26 summit because Greece should try to solve its debt problems itself. By contrast, EU officials have insisted that some form of support package needs to be agreed by the 16 nations in the euro zone.
Jean-Claude Juncker, the head of the euro group of euro zone finance ministers, said Monday that the bloc "has to have an instrument available to it which will allow it to help Greece in this very difficult situation."
"Greece will not be abandoned if we see it needs the euro zone's assistance," he told the European Parliament's economy committee.
He said at least two euro zone nations opposed offering loan guarantees to Greece, which made that impossible as a bailout strategy.
He said it was "quite possible" that a euro zone country in trouble might get a joint financial rescue from the International Monetary Fund and other euro zone nations, which would provide the lion's share.
So far, the political support proffered by the euro zone and the Greek government's massive austerity packages have done little to reduce the price investors are asking to lend Greece money.
That's unsustainable in the long run. Although the government has said it can wait until the end of April to borrow more money, it's economic situation is dire — the Bank of Greece estimates the economy will contract by 2 percent this year, more than previously expected.
Greek Prime Minister George Papandreou effectively gave his partners an ultimatum on Friday, telling them that he would consider going to the IMF if the euro zone could not come up with something more tangible at this week's summit.
Loans from the IMF would certainly be cheaper than borrowing in the markets — on Friday, the interest rate on Greek ten-year bonds spiked to 6.42 percent, the highest level since late February and the spread between Greek and German ten year bond yields has moved back up to around 340 basis points.
Analysts say that Greece will find it difficult and eventually self-defeating to roll over its upcoming debt paying that sort of premium. Conversely, raising the cash after a package of measures from euro zone partners would probably be possible without IMF help, analysts reckon.
"Ahead of major bond redemptions, Greece wants to bring down its funding costs fast," said Holger Schmieding, European economist at Bank of America Merrill Lynch.
"Greece apparently feels entitled to ask for financial support...after all, Greece has passed two harsh IMF-style austerity programs, but is currently getting only verbal support, with no financial aid from Europe or the IMF," Schmieding added.
EU Commission President Jose Manuel Barroso was "still hopeful" that euro zone leaders would heed his call for a decision on coordinated bilateral loans for Greece. Barroso said they wouldn't need to be paid out instantly.
Earlier this month, the Greek government pushed through a package of measures to get its budget deficit down by four percentage points to 8.7 percent of national income this year, winning plaudits in the money markets as well as in the EU.
However, any optimism proved short-lived after the Germans seemingly reneged on a promise to join in a euro zone plan to offer Greece bilateral loans, if needed.
German public opinion remains resolutely against supporting Greece and Merkel is preparing to lead the government into local elections in May.
Merkel's tough rhetoric against a Greek financial rescue deal has also put her government at loggerheads with the French, who have been more approving of a Greek bailout deal. The two also disagree on potential IMF involvement, with Merkel open to the idea but French President Nicolas Sarkozy adamantly against any involvement by his long-time rival, IMF chief Dominique Strauss-Kahn.
Unsurprisingly, with Europe in a stalemate over what to do with Greece, the euro has foundered. It was down a further 0.3 percent on Monday at $1.3477, its lowest since the start of the month.
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