Greece has confirmed its expected request to the European Union and the International Monetary Fund (IMF) for a bailout of €45 billion as initial assistance in its economic crisis. Athens will have to pay out on bonds worth about €8.5bn which mature in May and also has to pay €54bn this year as debt-servicing on €300bn. In addition, the country's budget deficit for 2009-10 was 13.6 per cent of GDP, or about €300 billion; the eurozone rules allow member states only three per cent. As for the bailout itself, the EU as a whole cannot provide such. Individual member states will contribute €30 billion for three years at five per cent, with Germany and France providing half that sum; the IMF is due to contribute €15 billion. Conditions will most probably focus on public-sector cuts and substantial changes to the state-pension system. Early public reactions in Greece have been hostile, with demonstrators particularly resentful of IMF involvement. Financial markets have responded selectively, despite Standard and Poor's downgrading of Greece's debt rating to junk.
Kenneth Rogoff, a former IMF chief economist, points out that national debt defaults and restructurings usually follow banking crises. He concludes that Greece must do all it can now to maintain international financial credibility so as to avoid IMF-imposed restructuring in future. But the matter is more complex than this assessment suggests. First, Greece is hardly alone; the U.S. budget deficit for 2008-9 was 9.9 per cent and the U.K.'s was 10.9 per cent for 2009-10. Sweden has also survived a comparable crisis. Secondly, Ms. Merkel's party, the Christian Democratic Union (CDU), faces a hard reelection battle in the province of North Rhine-Westphalia and needs to talk tough on Greece. Thirdly, the preceding Greek government, a conservative one, hugely expanded public spending and the budget deficit, by increasing public-service employment and failing to tackle widespread tax fraud. Meanwhile, the EU's regulatory bodies did nothing about the country's rising budget deficit, and Greece colluded with an investment bank to falsify the figures. Finally, Prime Minister George Papandreou has announced measures to crack down on tax evasion, to raise taxes, and to cut the budget deficit by four percentage points in the current financial year. The EU is also likely to adopt tougher regulations, which will reduce the capacity of private players to attack member states through financial markets. The Greek crisis, though serious, gives the EU an opportunity to help a member state, curb predatory financiers, and improve its own institutions and procedures.