Greece Asks for a Bailout, but at What Cost?

Speaking from the picturesque island of Kastelorizo on Friday, April 23, Greek Prime Minister George Papandreou called on his European Union partners and the International Monetary Fund (IMF) to send the lifeboat they have been promising. Comparing Greece to a sinking ship, Papandreou said he had no choice but to activate the $60 billion aid package agreed on earlier this month by European finance ministers to help his deeply indebted nation stave off default. "I have asked our partners to contribute decisively in order to give Greece a safe harbor," he said. "At the same time, we are sending a strong message to the markets that the E.U. is serious about protecting its common interests and common currency."

This is a humiliating moment for Greece, a country that prides itself on being the cradle of Western civilization but that has spent much of its modern history buffeted by foreign powers. Now Greece finds itself at the mercy of its European partners and the IMF, both of whom are likely to demand their pound of flesh in return for aid.

The rescue will be a first for a euro-zone country and sends the 11-year-old single-currency union into uncharted waters. There's no rulebook and no guarantee that it will be successful. Officials from the IMF, the European Central Bank and the European Commission have been holding talks in Athens since Wednesday, but Greek officials insisted they were precautionary. For weeks, though, analysts have been saying it was a matter of when — not if — Greece would need to call for help.

A barrage of bad news Thursday finally pushed the Greek government into action. The E.U.'s statistics agency Eurostat released figures saying Greece's 2009 deficit would hit at least 13.6% of GDP — up from a previous prediction of 12.7% — and that it could rise to above 14%. On the heels of that news, Moody's, one of the world's three biggest debt-rating agencies, downgraded Greece yet again.

The double blow to Greece's already fragile credibility sent interest rates soaring. With investors comparing the country's creditworthiness to that of countries like Pakistan, Papandreou felt he had no choice but to ask Europe to make good on its promise of assistance. "It was inevitable, and it is a good thing in that it comes as a relief and it kind of quells all the volatility we've been having," says George Pagoulatos, a professor at the Athens University of Economics and Business. "Clearly the IMF has an image problem in Greece, as it does in other places in the world. On the other hand, the lending comes at a low interest rate, and it comes with the know-how that could prove helpful for the restructuring of the Greek public system."

Although the broad outlines of the rescue have been agreed on, including the interest rate of about 5% that Greece will have to pay to borrow money from other euro-zone countries, many other details have yet to be hashed out. Two of the largest contributors to the package, France and Germany, must gain parliamentary approval for any loan to Greece. That may prove to be a sticking point in Germany, where there's widespread opposition to a Greek bailout, with many Germans feeling they shouldn't have to foot the bill for Greek profligacy.

At home, Papandreou may face an even bigger battle. So far, Greeks have largely accepted austerity measures, but many are worried that the IMF and other euro-zone countries will demand another round of painful cuts, and warn that there's only so far the Greek people, who have a well-developed culture of protest, can be pushed. "How will the Greek people pay for this?" asks Anastasia Thanasis, a 25-year-old accountant. "Because it will be the Greek people who pay." Thanasis adds that life is already hard for young people in Greece and that if the economy worsens, many would be forced to leave. "The salaries are already low in comparison to the price of housing, electricity and everything," she says.

On Friday, Papandreou said he hoped accessing the rescue package would give Greece the breathing room it needs to move forward on his reform agenda, which includes modernizing the Greek state and tackling the country's pension morass. Evoking the ancient hero Odysseus and his epic journey home from the Trojan War, the American-born Prime Minister also warned that Greeks should have no illusions about how tough the process will be. "We are on a difficult path, a new odyssey for Greece and for the Greek nation," he said. "But we know the way to Ithaca, and we have charted the waters in our quest." Odysseus' quest took 10 years. The Greeks can only hope their journey to fiscal solvency won't take as long.