EU Offers $40 Billion in Aid to Greece

Greek Prime Minister George A. Papandreou speaks during a press conference at the European Union summit at the European Council headquarters on March 26 in Brussels. (John Thys/AFP/Getty Images )

There’s light on the horizon for Greece. Mired in fiscal crisis, the small European Union (EU) nation on Sunday was promised a lifeline in the form of a 16-country, 30 billion euro, loan package from EU members.

Greek lawmakers and financial markets breathed a collective sigh of relief.

Olli Rehn, the EU monetary chief, told reporters that the International Monetary Fund (IMF) is ready to step in with another 10 billion euros ($13.5 billion) in funding, if needed.

The news was announced in an emergency video conference as finance ministers worked on Sunday to finalize a plan that was agreed upon in March, but lacked details until Sunday.

In the plan, Greece would pay interest rates of around 5 percent, according to reports, far lower than the rate it would have to pay in the open market.

Analysts expect the global financial markets to cheer the news on Monday morning.

On Sunday, Greek Prime Minister George Papandreou said in an interview with Greek daily To Vima that the country will lean on a bailout as a last resort. Greek Finance Minister George Papaconstantinou echoed this view, telling reporters that Greece would try to borrow from the financial markets rather than tapping the rescue loan.

Sigh of Relief

The news tempers the uncertainty that Greece may not be able to make its debt repayments this month and next month, as a bailout is all but imminent.

Earlier, Fitch Ratings cut the credit rating of Greek debt to the lowest level among investment grade, from BBB+ to BBB-, underscoring the uncertainty surrounding the Greek government’s ability to stabilize its finances. Its outlook remains negative.

A rating of BBB- is only one notch above “junk”-status.

“The sharp rise in interest rates faced by the government this year, in combination with a deterioration in the outlook for economic growth, will make it harder for the government to achieve its fiscal targets of reducing the deficit to 8.7% of GDP this year and ensuring that public debt peaks at just over 120% of GDP in 2010 and 2011,” Fitch said in a notice.

EU leaders had repeatedly stressed that if needed, their countries would step in and help. Italian Prime Minister Silvio Berlusconi and French President Nicolas Sarkozy, as well as EU President Herman Van Rompuy have all told European media that they are ready to assist.

Deep Fiscal Problems

But many analysts feel that a bailout is only temporary as Greece’s fiscal problems run deep. It remains to be seen if Athens has the political cohesion to stick to its fiscal budget cuts.

So far, however, street riots in Greece have failed to derail deep budget cuts the government hopes to achieve to bring its finances in balance.

Greece’s high debt load is also alarming. Currently, the country’s debt is more than 110 percent of its total annual economic output.