Euro zone uncertainty threatens Greek rescue


Greek politicians were racing to implement the savage budget cuts demanded under the terms of the country’s emergency bailout as questions emerged over whether the deal could be derailed by arguments over how to fund it.
Germany could cause the deal to unravel if it continues to oppose the euro zone creating a €750 billion ($A930 billion)fund to act as a firewall against spreading of financial woes.
At a G20 summit of finance ministers in Mexico that starts on Saturday, the European Union will plead for increased contributions to the International Monetary Fund from non-EU countries to help shore up the firewall, which is seen as essential to stop Greek debt “contagion” spreading to Spain and Italy.
But the IMF is expected to refuse to make extra cash available and will threaten to pull the plug on its contribution to Tuesday’s €130 billion Greek bailout unless the euro zone creates a €750 billion fund.
The EU’s economic and monetary affairs commissioner, Olli Rehn, wants to unite the existing European Financial Stability Facility (EFSF), worth €250 billion, with a new European Stability Mechanism valued at €500 billion.
“This is very important to show that we have credible instruments to ensure we have financial stability in Europe,” he said. “It is also very important to encourage our international partners in the G20 and IMF to move in order to increase the resources of the IMF, which form a global financial firewall but also contribute significantly to the European financial firewall.”
Germany has opposed calls to merge the two funds because it will increase Germany’s liability and exposure to a euro zone default by 50 per cent, an issue that threatens a Bundestag revolt on the Greek bailout.
The debate will dominate an EU summit in Brussels on March 1 and is expected to spark a major political battle when Germany’s parliament debates the Greek bailout in Berlin next week.
Meanwhile, the Greek government will push to qualify for the bailout by carrying out reforms by the end of the month, including a crackdown on bribery, tightening up tax collecting and selling state assets.
Analysts continued to cast doubt on whether the bailout could rescue the country’s troubled economy, which has lost 17 per cent of its gross domestic product in a five-year recession and would be bankrupt without aid. There are concerns further cuts might just deepen the recession, making it even more difficult for the Greek economy to recover.
Andrew Balls, the head of European portfolio management at Pimco, a leading bond investor, told the Financial Times: “It is all an exercise in make believe. Does anybody really believe any of the Greek sustainability numbers?”
Jennifer McKeown, senior European economist at Capital Economics, said there was still a risk of Greece leaving the euro zone later this year because of social unrest, the austerity measures and deeper recession.
But Greece’s Finance Minister, Evangelos Venizelos, said the deal meant “a nightmare scenario” had been avoided. “This was a significant development that gives our country a new opportunity.”
The deal is opposed by several of Greece’s left-wing parties who are mobilising against it before the national elections.

First published in the Sydney Morning Herald.