Germany could back more aid for Greece

Associated Press
German Finance Minister Wolfgang Schaeuble delivers his speech on the bailout package of the Eurozone for Portugal during a debate at the German parliament Bundestag in Berlin Thursday, May 12, 2011. (AP Photo/Markus Schreiber)

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Germany has signaled it could back more help for struggling Greece, the clearest official admission yet that the international bailout and austerity plan agreed last year to restore confidence in the country is failing.

German Finance Minister Wolfgang Schaeuble said Thursday in parliament that his government could back more aid if Greece continues to find it impossible to raise funds by selling bonds.

Schaeuble insisted that any further assistance must be tied to tough terms, arguing it is up to the Greeks to solve their underlying budgetary and structural problems: "We won't approve additional measures without clear conditions."

Germany is Europe's biggest economy and is a central, though sometimes reluctant, player in resolving the debt crisis. Its economy is growing strongly due to strong exports and painful labor market reforms made years ago, and many people there resent having to bail out Greece's free-spending ways from the past decade.

EU officials have indicated more help will be needed to help Greece honor its debts beyond 2013, when the current bailout program expires.

They have not said publicly how much extra money Greece might need, but hinted that the eurozone's 17 finance ministers are likely to make a broad announcement on potential new measures after their meeting in Brussels on Monday.

The final details, however, will have to wait for a report by debt inspectors in Athens.

The International Monetary Fund, the European Central Bank and the European Commission are currently evaluating Greece's progress on the terms of its euro110 billion ($158 billion) bailout that saved it from bankruptcy. They will decide on whether to release the next round of funds and their report, due next month, will estimate Greece's funding shortfall next year.

"If it appears that Greece cannot return to the financial markets within the time frame assumed last year, then we have to talk about what additional measures Greece, first and foremost, can take, what can be done in addition to solve the problem," Schaueble said.

Greece's crisis is the result of years of inept governance, widespread corruption and waste that created bloated budget deficits and a public debt amounting to about 150 percent of economic output.

Despite drastic spending cuts already implemented — with reductions to pensions and salaries accompanied by an increase in taxes and retirement ages — investors still don't trust Greece to repay all its debts. As a result, its borrowing rates are prohibitively high, freezing it out of bond markets.

If that situation continues, Greece would need more help. It is supposed to raise some euro27 billion ($39 billion) on capital markets next year, but that seems unlikely.

Greece badly needs economic growth to support its debt reduction drive, but it is expected to remain in recession this year. Official data on Thursday showed unemployment rose to 15.9 percent in February from 15.1 percent in January.

Economists say Greece has so much debt that it may have to restructure it — give investors new bonds pay them less or later, so that the value of the debt is reduced.

A top European Central Bank official said Thursday however that that is a bad idea.

Jose Manuel Gonzalez-Paramo, a member of the bank's six-member executive council, says he's surprised by the ease with which people advocate restructuring.

"I am rather surprised to see the flippancy with which some commentators recommend that the government of an advanced economy should infringe its legal and contractual obligations," Gonzalez-Paramo said, "as though breaching the trust of investors and citizens were the simplest and least costly solution to the deeply-rooted structural problems in Greece."

While debt restructuring is relatively common for developing countries, it would be entirely different for a rich country that is closely connected to other European economies through trade and financial ties, said Gonzalez-Paramo.

Greece's connections to other economies mean that trouble there could spread and cause trouble far beyond its borders, he said.

The IMF warned that the rest of Europe needed to strengthen its banks to avoid the troubles in Greece — and debt stricken Ireland and Portugal — from spreading through the financial system. Many banks elsewhere in Europe hold bonds from the stricken countries, and have financial cushions considered too thin to absorb big losses on those bonds

A top IMF official said Greece should be able to pay its debts with the help of reforms and the current bailout, but left the door open to changing that assessment after the review due in June.

"We have to decide as we go along whether we are still confident the Greek debt is sustainable or not and you can expect the fund, together with our European partners, to take a position on this in about a month's time," Antonio Borges, director of the IMF's European department, said at a news conference in Frankfurt.


Nicholas Paphitis and Elena Becatoros in Athens and David McHugh in Frankfurt contributed to this report.

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