2010-04-25
BERLIN (Reuters) - European heavyweights Germany and France vowed on Sunday to take a hard line with Greece in exchange for financial support as doubts emerged over whether a 45 billion euro aid package was sufficient to prevent a default.

Greece bowed to intense pressure from financial markets on Friday, requesting funds from the European Union and International Monetary Fund (IMF) in what would be the first bailout of a member of the 11-year-old single currency bloc.

The debt-saddled country has announced billions of euros in austerity measures, including tax hikes and public sector wage cuts, but must now agree additional steps to satisfy the EU and IMF, and ensure the aid flows.

German Finance Minister Wolfgang Schaeuble warned Greece that a tough restructuring of its economy was "unavoidable and an absolute prerequisite" if Berlin and the EU were to approve the aid Greece has requested.

"The fact that neither the EU nor the German government have taken a decision (on providing aid) means the response can be positive as well as negative," Schaeuble told the Sunday edition of German daily Bild.

"This depends entirely on whether Greece continues in the coming years with the strict savings course it has launched. I have made this clear to the Greek finance minister."

Schaeuble's French counterpart Christine Lagarde promised to hold Greece accountable for "unsuitable economic policies" that pushed its 2009 budget deficit to 13.6 percent of gross domestic product (GDP) and its debt to 115 percent of economic output.

She described the aid package as a "cocktail of indulgence and great strictness", telling the Journal du Dimanche weekly that Greece's partners would closely monitor its progress in restoring order to its creaking finances.

"We will (release the aid) according to their needs and in the case of default on repayment, we will immediately put the foot on the brake," Lagarde said.

Germany and France are due to provide about half of the 30 billion euros in aid the EU has tentatively pledged for Greece. The IMF is expected to put up the remaining 15 billion.

DOUBTS ON AID PACKAGE

Only days after Greece requested the aid, however, doubts were emerging over whether the package was large enough to calm market fears of a debt default.

Those fears have pushed the yield on Greek 10-year bonds above 8.7 percent, a whopping 567 basis points over the rates on benchmark German Bunds.

This has made it prohibitively expensive for Athens to service its mountain of debt. Greece's formal request for aid on Friday did little to ease market pressures.

Speaking to reporters in Washington at the weekend, Canadian Finance Minister Jim Flaherty acknowledged that some European and G20 countries believed the aid was inadequate.

"There is concern about making sure that the package is enough so that it's a one-time event," he said.

There are also worries about public opposition to further austerity steps in Greece. Greek riot police fired teargas at protesters who held an impromptu march through central Athens on Friday to protest austerity.

A poll released on Saturday showed that roughly two-thirds of Greeks believe Prime Minister George Papandreou's socialist government was either too slow to react or handled the economy poorly as the country's fiscal crisis deepened.

Centre-left newspaper Eleftherotypia said the "spectre of Hungary" was haunting Papandreou's government. Voters in Hungary booted out the socialist government this month after it tried to push through painful IMF-ordered budget cuts.

Kathimerini, a centre-right newspaper, said Greece was entering a tough and unpredictable period.

"It may turn out for the better, or it may turn us into what the Anglo-Saxons call 'a failed state'," it said in an editorial.