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Greek support plan

Greek support plan

Published on May 4, 2010
French contribution – Greece/austerity plan – Rating agencies/AMF – Stability Pact - Interview given by Christine Lagarde, Minister for the Economy, Industry and Employment, to the “Le Monde” newspaper (excerpts)

Paris, May 4, 2010

GREEK SUPPORT PLAN

Q. – Is this €110 billion plan going to be enough to contain the financial markets’ attacks?

THE MINISTER – I should hope so. With this plan, Greece is completely protected for two and a half years. She doesn’t need to get finance from the financial markets. She will be immunized against external risks, so she will be able to implement all the recovery measures.

Q. – Why has the figure for this plan tripled in a few weeks?

THE MINISTER – Because we’re no longer thinking in terms of one, but three years. IMF programmes are for a minimum of three years. We’ve moved to a €110 billion aid package over three years, including 80 billion provided by Euro Area member countries.

Q. – Isn’t it because the Europeans delayed intervening?

THE MINISTER – The more you delay, the higher the cost. It’s the price of democracy. We groped around. In the European treaties no provision was made for dealing with such a crisis. To join the euro, it was necessary to comply with the Maastricht criteria and then the Stability Pact. It was a guarantee that rescue plans wouldn’t be needed. And then because of the crisis and scale of Greek deficits there was a loss of confidence, resulting in speculation on the Greek debt and its downgrading by certain rating agencies in scandalous circumstances.

Q. – Is the crisis due to speculation, as Nicolas Sarkozy said, or worsening deficits, as Angela Merkel has maintained?

THE MINISTER – Both, Greece provided erroneous statistics. In 18 months, the predicted public deficit went from 6% of GDP to 12% then 13.7%. That’s the basic problem. And then on top of this came the speculation which worsened the crisis. We found ourselves in a spiral which we had massively to curb.

FRENCH CONTRIBUTION

Q. – How much will the French contribution be?

THE MINISTER – 20.7% which tallies with her share in the European Central Bank. Once we move to a three-year programme, we will be able to lend €16.8 billion instead of the €6.3 billion initially provided for.

At the practical level, this means that we are going to sign bilateral loan contracts with Greece, coordinated by the European Commission.

These will amount to €3.9 billion in 2010. The first year, we won’t need to modify our bond issuance programme. On the other hand, in 2011, 2012 and part of 2013, it will need to be increased so as to raise the further €12.9 billion on the markets. We will lend to the Greeks for three years, at a fixed rate of 5%. If the loan’s duration exceeds three years, the rate will rise to 6% to encourage swift reimbursement.

Q. – The French State currently borrows at 1.5%, so it’s going to gain on the loan to Greece?

THE MINISTER – The interest rate rewards the risk. And we don’t want to lend at super high rates, so we don’t encourage vice. The variable 3.75% rate which the IMF lends at is equivalent to the 5% fixed rate we are granting.

Q. – You’d like the banks to participate in the effort to assist Greece. How?

THE MINISTER – They must maintain the commitments they have in the country.

GREECE/AUSTERITY PLAN

Q. – Can Greece bear the austerity cure being imposed on her?

THE MINISTER – The Greek government is convinced that these are tough, very stringent measures which are essential to restore public finances and Greek competitiveness. It feels they will allow development of sustainable growth and employment. It takes the view that if the burden is borne fairly by the population, it will be politically acceptable. But it will inevitably be painful. Greece is likely to have a more serious recession, 4% in 2010, and 2% in 2011, but without deflation.

Q. – What guarantees that the plan will be implemented?

THE MINISTER – Every quarter, the Commission and IMF will go to Greece to check with the Greek government that the commitments are being carried out. The release of the successive tranches will depend on the results.

RATING AGENCIES/AMF

Q. – How can we prevent such crises recurring?

THE MINISTER – When Standard and Poor’s notifies a State’s deterioration 15 minutes before the markets close, this is an open invitation. It guarantees that everyone who has got shares will offload them, without having time to think, in order not to be caught by the closure. I am going to take advantage of the European directive on the rating agencies which comes into force on 7 June to ask the Autorité des marches financiers [French financial markets regulator] to supervise them, look at the conditions in which they operate, demand that they notify their model and get it validated, show how they are honouring the rules on conflict of interest, separation of activities, and the way they distinguish between the rating of private and public risk. The rating agencies must think about codes of conduct which are operational.

Q. – Ought it to be possible to make them accountable?

THE MINISTER – We have to think about that.

Q. – Will the Franco-German summit take initiatives on this subject?

THE MINISTER – Discussions at the highest level have begun on the rating agencies, regulation, transparency, provision of information, the emergency measures the CDS market needs on sovereign debt and then, more generally, European governance. We have to learn the lessons of the past few months.

STABILITY PACT

Q. – Ought the operation of the Stability Pact to be modified?

THE MINISTER – Yes, it’s absolutely necessary to keep competitiveness and financial stability under our radar. We haven’t paid enough attention to the gaps in competitiveness which were being created between Germany on one side, and Greece, Portugal and Ireland on the other. These gaps are very worrying since they are growing. More effective action is also going to be necessary in the event of a downward slide of debt, deficits or competitiveness. Establishing prevention and early-warning mechanisms so that we can detect earlier a risk of a country beginning to miss the target when it comes to debt, deficit or competitiveness.

Q. – That’s been said a lot in the past without result…

THE MINISTER – When it costs us €110 billion, the approach changes! (…)./.

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