By Luke Baker
BRUSSELS, March 18 (Reuters) - The European Union and Greecehave been discussing how to resolve Athens" debt crisis forseveral months, with the possibility of euro zone countriesproviding a safety net.
Following are some questions and answers exploring thediscussions that have gone on between the EU and Greece, andlooking ahead to a summit of EU leaders on March 25-26, whenGreece"s situation will be high on the agenda.
WHAT IS GREECE"S PROBLEM AND WHAT DOES IT WANT?
Because of profligate spending over nearly a decade andfalse statistics-keeping, Greece is faced with a budget deficitof nearly 13 percent of its gross domestic product and debtsedging towards 120 percent of annual output.
It now has to raise taxes and cut spending to bring itsbudget into line, while also raising money in financial marketsto finance its debts. This year it will have to borrow 53billion euros, much of which will be used to meet interestpayments, including 20 billion euros in April and May alone.
Given the risks attached to that much borrowing when thecountry"s finances are in such disarray, investors are demandinga higher premium to buy Greek debt.
At the moment, Greece must pay an interest rate around threepercentage points more than Germany to borrow money in financialmarkets, a rate that is unsustainable in the long run.
As a result, Greece is looking to the European Union -- andspecifically the 16 countries that share the euro singlecurrency -- for concrete ways in which it could help if Greecewere to be unable to meet its obligations.
Such financial support, even if it is not drawn on, wouldshow financial markets that Greece is not a one-way bet and helpreduce debt financing costs, the Greek government argues.
WHAT IS THE EU AND EUROZONE POSITION?
Whether by design or otherwise, the EU and euro zone financeministers have essentially adopted a three-pronged strategy.First, they have urged Greece to get its finances in order,insisting the critical first step must be for Athens to reducegovernment spending and find sustainable ways to increaserevenue so that it is better positioned to tackle its debts.
Second, at every opportunity ministers and EU leaders havemade clear that they support Greece in its efforts to tackle itsproblems and stand ready to help if asked -- verbal support thatis designed to restore market confidence in Greece"s ability toweather the crisis but which has not entirely succeeded.
Third, EU finance ministers have endorsed a "mechanism" --which they have not disclosed -- which will be used to helpGreece if it asks for assistance.
The mechanism, which would essentially amount to a bailout,is expected to involve bilateral loans. EU member states,particularly Germany, are very reluctant to resort to suchmeasures, which would be the first bailout in the euro zonesince the euro came into being a decade ago. Any such move wouldprobably weaken the euro further.
WHY DOES GREECE KEEP TALKING ABOUT GOING TO THE IMF?
Greece"s Prime Minister George Papandreou puts forward theargument that his country is already making tough structuraleconomic adjustments that are akin to an International MonetaryFund programme, but it isn"t receiving access to financialassistance as it would do under an IMF umbrella.
As a result, he says, EU political support and pressure torestructure the economy is only going to help if it is backed upby a concrete offer of financial aid -- like an IMF programme.Otherwise Greece might as well turn to the IMF right away,something the EU doesn"t want to have happen because, broadly,it sees Greece"s problems as something to be sorted out by theEU"s institutions and member states.
WHAT"S THE NEXT STEP?
Greece cannot go on forever financing and refinancing itsdebts at high interest rates, especially given that the economicadjustments it is making to cut its budget deficit will resultin slower economic growth in the short run. Economists, thefinancial markets, Papandreou and EU officials all know that.
On Thursday, Papandreou made it clear he wants the EU to layout an offer of financial support soon, so that he can at leastsee what it looks like and decide whether it would work forGreece if it should need the lifeline.
But he also hopes that by detailing what"s on the table --including how any funds would be supplied to Greece and at whatinterest rate -- financial markets and those who have made moneyfrom Greece"s difficulties will take note and back off, which initself would help lower the costs of Greek debt financing.
EU leaders meet in Brussels for a summit on March 25-26.That is now shaping up as the next deadline for Greece to "seethe money" or perhaps cut to the IMF for assistance.
Germany, the EU"s largest economy, which will be central toany financial support for Greece, remains fundamentally opposedto a bailout. It regards it as a violation of the foundingprinciples of EU economic and monetary union, and cannot justifypolitically telling German taxpayers that they have to help bailout overspending Greeks.
The question is whether the Greek threat of going to the IMFwill be enough to force the EU"s hand and prompt action fromGerman Chancellor Angela Merkel, before the stakes get too highand the possibility of Greek default becomes a reality.
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