“This is a short-run fix, not a long-run solution,” said David Owen at
Jefferies Fixed Income. “At the end of the day, Greece has to carry out
monumental fiscal tightening even as it slides deeper into recession. They
risk chasing their tale.”

Mohamed El-Erian, head of the US bond fund Pimco, doused hopes that his
firm would soon step in to buy Greek debt, saying the rescue package at
rates near 5pc does not address the underlying “solvency challenges” facing
the country.

The German taxpayers’ union accused Chancellor Angela Merkel of caving into
pressure, saying Germany would be left on the hook for huge liabilities.

Christoph Steegmans, spokesman for the finance ministry in Berlin, insisted
that “nothing had changed” as a result of the weekend pledge by eurozone
states for €30bn of loans. Help is “not automatic” and cannot be activated
if any state objects. “The fact that the fire extinguisher has been primed
says absolutely nothing about the probability of a fire,” he said.

Frank Schäffler, a Free Democrat finance expert in Mrs Merkel’s coalition,
said the rescue deal is “clearly a subsidy” and violates the EU summit deal
in March. “We’re on very thin ice legally,” he said, hinting at likely
court challenges.

Professor Ekkehard Wenger from Würzburg University said the aid for Greece
is “another step on the slippery slope downwards. All rational economic
rules are being thrown out of the window. This is a bottomless pit.”

“In the short-term this may calm things but within 10 years the eurozone is
not going to exist any longer in its current form,” he told Handelsblatt.

The IMF is waiting in the wings with a further €15bn but has yet clarify
its terms. The fund usually demands a devaluation to give countries a
lifeline. Its menu of options includes a “pre-emptive debt restructuring”
in cases where public debt has gone beyond the point of no return,
typically above 100pc of GDP. Greece’s public debt may reach 125pc this
year, according to Brussels.

Dominique Strauss-Kahn, managing director of the IMF’s, said that neither
default nor EMU exit were options for Greece. “The only effective remedy
that remains is deflation. That will be painful. That means falling wages
and falling prices. There is no other way for Greece to become
competitive,” he said.

Fitch Ratings yesterday downgraded mortgage bonds issued by three Greek
banks. This followed a move last Friday to cut Greek sovereign debt to by
two notches to BBB-, the minimum required by the European Central Bank for
loans.

Chris Pryce, Fitch’s Greece expert, said the joint EU-IMF deal does not
alter the picture. “This was a good package over the weekend, but we stand
by our rating downgrade,” he said.

“It provides some clarity on interest rates and should help Greece through
to the end of the year, yet even if Greece accepts the EU offer it will
have to borrow a similar amount next year, and a similiar amount the year
after, and the year after that it will need to repay this lending.”

Mr Pryce said Greece’s plan to cut the deficit by 4pc of GDP this year is
feasible given the resilience of the Greek service and tourism industry,
and a revival in global shipping. “The issue is whether they can carry the
Greek people when have to make the next round of cuts in 2011, which will
be decided later this year. Considerable political infighting is likely,”
he said.

Daily Telegraph – Tuesday 13th April 2010