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EU Offers Greece $40 Billion Aid Deal

After two earlier pledges of support, the European Union came to Greece’s rescue Sunday with a concrete package of low-interest loans aimed at stemming Greece’s debilitating debt crisis.

What are the terms of the EU offer?

Under the offer, Greece can take advantage of up to 30 billion euros (about $41 billion U.S. dollars) in loans at about 5 percent interest for a three-year loan, lower than the 7.5 percent interest Greece could get on the wider market as of last week.

The size of the offer, which exceeded the expectations of market watchers, is designed to help Greece refinance debt that comes due in the next few months, and assure investors that the country will not be allowed to default.

In addition to the $40 billion loan offer — which Greece must formally request and which must then be approved by all 16 countries in the eurozone — the International Monetary Fund is expected to kick in another 15 billion euros (about $20 billion) at potentially lower interest rates, should Greece request additional assistance.

Greek officials are taking pains to stress that they haven’t yet requested assistance and that they still hope to borrow what they can from the international bond market. And in Germany, where there has been fierce public opposition to a bailout of Greece, officials are also suggesting that the offer is simply an option at this point. “Just putting up a fire extinguisher on the wall does not say anything about the probability that it will ever be needed,” German government spokesman Christoph Steegmans said, according to the Associated Press.

Does the loan offer solve Greece’s debt crisis?

The offer removes the immediate risk of the country defaulting on its debts, but it may not even be enough to cover the Greek government’s borrowing needs for this year. Officials in Athens [say](http://www.google.com/hostednews/ap/article/ALeqM5iXUJvBknZVGqsBenIusBgBvWj5WQD9F1JV200) the amount is adequate, but The Economist [says](http://www.economist.com/business-finance/displaystory.cfm?story_id=15892064&source=features_box_main) the country “needs to borrow about 11 billion [euros] [or about $15 billion] by the end of May to roll over maturing debt and service interest charges. All in all, the country may need to borrow more than 50 billion [euros] [or about $68 billion] in 2010 (estimates vary).”

The bigger challenge is tackling the country’s fiscal deficit while simultaneously attempting to jumpstart growth, a tall order given the country’s current fiscal straits. “Without growth, the debt is only sustainable if someone will finance them at much less than 5 percent” for at least the next decade, Goldman Sachs economist Erik Nielsen told Bloomberg News. “The exact interest rate charged on the bailout package is a bit of a red herring.”

What does the offer mean for other debt-laden EU countries, such as Portugal, Spain, and Ireland?

Even countries facing their own mountains of debt have agreed to take part in the loan program to Greece, with Germany — the EU’s biggest economy — making the biggest pledge.

But beyond whether troubled economies have the means to help a neighbor, concerns are already mounting about the precedent set by stepping in to help a country that is perceived to have acted profligately.

“We are still lurching from crisis to crisis in Europe,” writes economist Simon Johnson on the Baseline Scenario. “The stronger Europeans, by coming to Greece’s rescue at this time with little conditionality, are effectively showing all the weaker nations that they too can get a package. This will undoubtedly reduce the resolve for needed fiscal reforms across the European periphery.”

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