After 3 months of agonising, it seems that a €45bn ($61bn) aid package will be offered to Greece. The Eurozone will offer €30bn, with a further €15bn coming from the IMF.
Greece’s GDP fell 2% in 2009. Experts now forecast a 4% fall this year. The government plans higher taxes, lower spending, and a 10% cut in public sector pay. But it still expects the budget deficit to rise from 12.7% to 12.9% of GDP, well above the 3% EU target.
Some form of intervention thus became inevitable last week, as Greece’s borrowing costs rose to 7.5%, with traders worrying that it might have to default on its debt. But Greece’s loan has come at a price, with Germany insisting on a 5% interest rate for the Eurozone loan, much higher than its own borrowing cost of 3.2%.
The aid package should mean that Greece’s immediate problems are solved. But the underlying question still remains unresolved. Is the Eurozone going to become a political union, where wealthier countries such as Germany finance poorer countries? This seems unlikely. And if not, what will happen if a large Eurozone member, such as Spain (GDP $1.35trn), finds itself in the same position as Greece (GDP $0.35trn)?
Chemical company CFOs will need to keep a very close eye on developments in coming months.
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Rather bleak situation in any case for Greece; all the countries under EMU will suffer, starting with the weakest links and expecting a following domino effect; European asymmetrical economies offers no resilience to the new currency, it works artificially well in boom times but prove to be a want-to-be giant with an “Achile’s heel” in rough times. The Euro is overvalued at best at the present time, at worst it can be in jeopardy of existence down the line if some countries are forced to go back to thier former currency to solve their specific economic-fiscal problems.
Germany, which is the big debtor of the group, stretched his capacity with East-Germany and is still chewing the big bite; it is not ready and willing to take another bite yet and moreover not for less organic countries to his.
Political rhetoric from France won’t convince anybody but themselves.