Greece bailout fails to revive market mood

Investors see Lehman shadow on bankrupt country. 

Markets and investors remained nervous on Monday, despite the green signal from eurozone finance ministers for an historically unprecedented bailout of debt-ridden Greece to the tune of 110 billion euros. The euro dropped against the dollar in both Asian and European markets, continuing the currency’s five-month-long downward trend. Since a December high of above $1.50, the euro has fallen more than 12 per cent. 

Analysts say that both long and short term concerns remain unaddressed by the much-delayed eurozone-International Monetary Fund (IMF) joint rescue package announced on Sunday. There are serious doubts being expressed over whether Athens can in fact sustain the austerity measures it has committed to in exchange for the aid. 

Large-scale protests from unions and workers erupted in Greece over the weekend at the prospect of salary cuts, tax hikes and more stringent work conditions. Greece is aiming to bring its fiscal deficit down to the EU limit of 3 per cent of gross domestic product by 2014, from 13.6 per cent in 2009. Other long-term concerns relate to whether the bailout will be enough to avoid the spread of debt contagion to other bigger European economies like Spain and Ireland. The threat of a similar crisis in Portugal is already imminent. 

In the near future, there are question marks regarding the passage of the bailout legislation in some of the eurozone member states’ parliaments. Germany, the region’s economic heavyweight, has dragged its feet on the matter for several months now, fuelling market panic. A group of German professors have announced that they will challenge the package at Germany’s constitutional court, claiming that it violates the “no-bailout” clause of the EU Treaties. 

According to wire reports, German Chancellor Angela Merkel’s Cabinet approved the aid on Monday but it also needs to be passed by both houses of Germany’s Parliament. Although Merkel is trying to fasttrack the approval in time for a summit of eurozone leaders in Brussels on Friday when the rescue mechanism is expected to be formally activated, Berlin’s actions over the last few months have given scant cause for confidence. 

Germany’s share of the loans is the biggest of any EU state at about ¤ 22 billion out of 80 billion, 8.4 billion of which is to be handed out in the first year. 

The need for speed is paramount. Not only does the risk of contagion to other countries increase with delay, Athens is due to make a big debt repayment to creditors on May 19. 

IMF chief Dominique Strauss-Kahn has said he is confident the IMF board will approve its share of a 30-billion euro contribution to the package by the end of this week. But f many investors, fears that Greece may turn out to be the Lehman Brothers of the sovereign world persist. All eyes will now be on Friday’s summit meeting and on whether eurozone members can deliver their end of the bargain.