nance ministers from the 16 countries in the eurozone today thrashed out the crucial details of a €30bn (£26bn) bailout fund for Greece, ahead of a crunch week for the heavily indebted nation.
Officials from Spain, which currently holds the EU presidency, brokered an agreement on a rate at which the eurozone states would lend money to the debt-ridden country, and the mechanism for making the cash available, during an emergency telephone conference.
"With today's decision, Europe sends a very clear message that no one, any longer, can play with our common currency, no one can play with our common fate," Greece's prime minister George Papandreou said.
The price of the loans is to be fixed with formulas used by the International Monetary Fund, with the interest rate expected to be pegged at about 5%, well below the market rates which Greece is being offered of more than 7%. That makes the facility, which Greek politicians have stressed they do not expect to use, much cheaper than the country raising its own cash in public markets which have become increasingly jittery about the possibility of Greece defaulting on its debts.
The situation, however, remains tenuous.
The constant in these examples is a country that, for a period, is allowed to live well beyond its means – in most cases by yoking its currency to another, and borrowing like there's no tomorrow. When tomorrow eventually arrives, investors wise up, realise their money is at risk, and get the hell out of there. Greece is on that precipice: its central bank has reported a rush of cash out of the country as domestic savers move their accounts to other EU nations – and who can blame them, given that they can do so almost for free? The government's already drastic austerity plans hinge on it being able to borrow at under
5 per cent, but investors are demanding more than 7 per cent. In short, it cannot go on alone much longer. Set against the scale of the problem, the 30 billion euro loan from the EU and IMF is a mere sticking plaster.
One option would be to follow the example of Britain, which managed to erode much of its debt by allowing the pound to fall by a quarter. If the powers-that-be in Frankfurt were persuaded to allow the entire euro to fall enough, thus driving up inflation in Germany, they could avoid both Greek default and the break-up of the currency. This would right the balance between the two countries (in Germany prices are too low, in Greece they are too high, and producers too uncompetitive). The problem, again, is the scale: the euro would have to more than halve in value and Germans would have to accept inflation of around 14 per cent for five years to make the adjustment. Not something politically feasible given the country’s history of hyperinflation.
The situation remains fluid.