Analysis: EU support for Greece was inevitable

BRUSSELS, Belgium — No Delphic Oracle was needed to predict that European Union leaders would, eventually, rally to support Greece’s floundering public finances.

From the moment back in October when revelations that the country’s finances were in a much greater mess than the official figures showed, it was clear that if the Greek government could not calm the market storm that broke over the country, Europe’s big economic hitters would have to step in.

The prospect that a member of the euro currency bloc, or eurozone, might default on its debts and the danger that an escalating Greek crisis would spread to Spain, Portugal and even Italy, could call into question the credibility of the euro itself. That was too big a risk for Europe’s leaders to take.

So after successive commitments to austerity measures from Greek Prime Minister George Papandreou failed to stop the market rot, Germany, France and the others had little choice but to produce today’s promise of "determined and coordinated action, if needed," to rescue the eurozone’s weakest link.

Europe’s leaders did not give details of the form a rescue plan might take or even hint at how much money they would be prepared to advance for the Greeks, but they insisted that the unprecedented political message was clear.

"Greece is part of the eurozone. Greece is part of Europe. We will support Greece," French President Nicolas Sarkozy told a press conference. "Everybody should understand what we mean, it’s clear, it’s unambiguous."

(Read more on Greek unrest in reaction to the government’s proposed budget cuts and Papandreou’s drive to increase government transparency.)

The deal means that if pressure mounts on Greece to the extent that Athens is faced with a default on its sovereign debt, Germany, France and other eurozone nations will reach for their wallets. They didn’t specify details, but likely options include direct loans or state-owned banks buying up Greek bonds.

"The modalities will have to be worked out depending on events," Sarkozy said.

Papandreou has not yet asked for a rescue and the eurozone remains hopeful that a bailout won’t be necessary. It hopes today’s summit statement sends a clear message to the markets that Greece’s partners won’t let the country go under.

Markets reacted cautiously. Bond spreads reflecting how much Greece has to pay to borrow narrowed on the news then widened, reflecting jitters at the lack of details from the European leaders. The euro also rose and then fell in the hours after the announcement.

The reluctance of the other eurozone nations to intervene on Greece’s behalf over the past few months had fueled excited headlines, notably in the euro-sceptic British press, about the imminent break-up of the euro.

In reality, Germany, the EU’s principle paymaster, has too much invested in the euro to allow the currency to founder despite widespread distaste at having to spend taxpayers’ money to bail out a country that has persistently flaunted the eurozone’s ground rules on low public debt and government deficits.

The leaders served warning that if a bailout becomes necessary, strict conditions will be imposed on Greece to ensure money is paid back and that stringent measures are taken to balance the books and stabilize the economy, including by cutting the deficit by 4 percent this year.

"Greece will not be left on its own, but there are rules and these rules must be adhered to," insisted German Chancellor Angela Merkel. She underscored that the EU will hold a monthly monitoring of the Greek economy to ensure that Athens is meeting its promises to cut costs.

One European official said that if the eurozone nations were obliged to come in with cash support for Greece, the conditions they would impose would "squeeze until tears run from the stones of the Parthenon." Officials suggested European conditions would be as tough as those that would have been imposed by the International Monetary Fund. Both Athens and Brussels are keen to avoid an IMF bailout, which would be a humiliating sign of eurozone weakness.

Greece needs to borrow 54 billion euro this year to plug fiscal shortfalls. Currently it is still able to raise money on the markets, but uncertainty about its finances have seen lenders raise interest rates, forcing it deeper into debt. Greece’s credibility has been undermined by admissions that the country had manipulated statistics to disguise the true level of its government spending gap.

When he was elected in October Papandreou acknowledged that Greece’s deficit in 2009 was likely to be 12.7 percent of GDP, double the previous official forecast and one of the EU’s highest. Under the so-called stability pact rules drawn up when the euro was launched in the late 1990s, member nations are bound to keep deficits to 3 percent. The rules have been relaxed for all members to take account of the economic crisis.

Papandreou has pledged to bring the deficit down to 8.7 percent this year, through a package of public sector wage and hiring freezes, raising the pension age and cracking down on tax evasion, but doubts have persisted over the government’s commitment to implement the measure in the face of strikes and social unrest.