Germany Organizing Greek Bailout

Based on the latest news reports, Germany has taken the lead in organizing a bailout plan for Greece. The financial support is likely to come in the form of guarantees or bilateral loans from Germany and other euro zone members.

“We don’t need to call in the IMF.”

Joaquin Almunia


The EU leaders are set to discuss the exact details of the plan when they meet for an informal summit on economic issues in Brussels Thursday. It seems likely that the bailout plan for Greece will be a package of  guarantees or bilateral loans.


German Finance Minister Wolfgang Schäuble told officials in Berlin on Monday that he had concluded there “was no alternative” to a rescue plan, reports the Wall Street Journal citing an anonymous source.

The Financial Times quotes German officials as saying that the steep decline in the euro and pressure on bond prices has forced Berlin to “take a significant step” to deal with the Greek debt crisis.

In the recent weeks Greece have come under tremendous pressure from the  financial markets due to doubts over the Greek administration’s capacity to push through tough austerity measures, leading to fears of a possible sovereign default and contagion to other euro zone members.

Athens will face a major test today with Greek public sector workers on strike over the government’s spending cut plans.

The protests might cause grounded flights at airports, shut government offices and schools and limited hospital operations.

Application Denied

The European Investment Bank, the main provider of long-term EU loans, made it clear Tuesday that it will not be  involved in a Greek bailout.

“The EIB’s mission and statute do not allow for bailouts in terms of budget deficits or balance of payments support to individual member-states,” Philippe Maystadt, the EIB president, said in a statement.

News that European Central Bank chief, Jean-Claude Trichet, will be flying back from Australia for Thursday’s summit helped to lift markets on Tuesday, although euro zone rules also prevent the central bank from bailing out national governments.

Non-euro zone members, like  Sweden and the UK, have suggested that the International Monetary Fund is best instrument for supply of financial support to Greece, although EU officials have widely rejected this method.

“We don’t need to call in the IMF,” EU economic commissioner Joaquin Almunia told the European parliament in Strasbourg on Tuesday.

A New sovereign Bailout Fund?

Another option is the creation of a special bailout fund.

“When Europe was created, they created solidarity funds for new entrants, but not for the euro members. This is what is needed now,” economist Joseph Stiglitz said on British television Tuesday evening.

Mr. Stiglitz is currently advising the Greek government.

A final decision on the plan may not come this week, but observers note that Germany guarantees at the moment is the most efficient way to prevent the spread of the debt crisis.

National Moral Hazard?

Whatever the final solution will be, the euro zone’s politicians will try to avoid a situation of moral hazard whereby chronic overspenders like Greece appears to be getting off easy.

Mr Almunia told the EU-MEPs that he hope leaders at Thursday’s summit will offer a “clear support” for Greece “in exchange for clear commitment [from the Greek authorities] that they will meet their responsibilities.”

“You don’t get support for free,” he added.

Taxpayers in Germany and other eurozone members involved in the Greek rescue plan will essentially take on the risk involved in providing Greece with guarantees or a large bilateral loan.

However, policy makers seems to be sure that the risks associated with taking no action are far greater.

As well as preventing a possible default, a resolution to Greece’s problems would help calm investor concerns over the health of public finances in Portugal,  Spain and other week European economies.

Several major European banks also have considerable exposure to the Greek economy, including billions of euros in loans to private individuals and companies.

Too Slow?

A number of senior MEPs criticised the European Commission for acting too slowly in tackling the problem of Greece’s budget deficit and rising debt levels.

Speaking after the European legislature officially approved a new commission for the next five years today, Liberal leader Guy Verhofstadt said Europe had committed a “strategical error” in not intervening earlier in the Aegean country.

“The European Central Bank and the commission should have responded from the start with a package for Greece and then we needn’t have gone through what we have seen in the last few weeks,” he said.

Latest update: Breaking Headlines: INTERNAL REPORT SAYS GERMANY GOVT CANNOT AID GREECE: PRESS (Zero Hedge)

Related by the Econotwist:

Denmark In Danger Of Becoming The “New Greece”

Greece: From Bad To Worse?

And The Euro Came Tumbling Down

Panic On The Trading Floor

The Greek Bond Bomb Keeps Ticking

Nordic Central Banks Agree On Baltic Bank Bailout

East European banks needs $304bn

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