Europe Falters in Bid to Rescue Greece

Finance chiefs say further aid depends on Papandreou delivering budget cuts.

Europe faltered in its race to save Greece from default as finance chiefs said further aid hinged on embattled Prime Minister George Papandreou delivering budget cuts in the face of domestic opposition.

On the eve of a confidence vote that threatens to topple Papandreou, the euro area’s top economic policy makers pushed Greece to pass laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July as part of last year’s 110 billion-euro lifeline.

“The Greeks have to bring to Parliament their austerity measures and their privatization package and they have to implement those measures,” Luxembourg Finance Minister Luc Frieden told Bloomberg Television as a euro crisis meeting in Luxembourg went into a second day. “Only if those conditions are fulfilled, we can pay out the next tranche and at the same time look for a possible second program to support Greece.”

Decisions on the next payout and a three-year follow-up package were put off until early July, prolonging Greece’s fiscal agony and heightening the brinksmanship that has marked Europe’s handling of the unprecedented debt crisis. The stumble negated gains made in markets last week after Germany indicated a second Greek bailout was in the works.

The euro fell 0.6 percent to $1.4253 at 11:30 a.m. in Frankfurt. Global stocks fell, with the MSCI World Index losing as much as 0.7 percent, and Treasuries and bunds rose.

No ‘Guarantee’
The ministers’ first seven-hour session, ending at 2 a.m., yielded a statement that Dutch Finance Minister Jan Kees de Jager said “is not a financial guarantee” for Greece. The meeting resumed today with discussions on a permanent rescue fund slated to be set up in 2013.

The deliberations coincided with a Greek parliamentary debate in Athens over a confidence vote in a new cabinet at what Papandreou called a “critical crossroads.” Papandreou has 155 seats in the 300-seat parliament.

The Greek premier said yesterday he planned to hold a referendum later in the year on a constitutional revamp with the goal of tackling the root causes of Greece’s debt and deficits that are “symptoms of the illness, not the cause.”

Papandreou in Brussels
Papandreou travels to Brussels today to meet European Union President Herman Van Rompuy and European Commission President Jose Barroso. The confidence vote is scheduled for late tomorrow. The Greek crisis is set to dominate an EU summit in Brussels on June 23-24.

“The communication cacophony surrounding the policy response in our view is one of the reasons why the risk of contagion has remained and remains high,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.

Group of Seven financial officials also convened during the euro ministers meeting, holding a teleconference to discuss Greece. Two weeks ago, President Barack Obama singled out Germany as the key country responsible for preventing an “uncontrolled spiral of default” in Europe.

Prospects for a second aid package to stave off the euro area’s first default were lifted by reassurances last week from European officials that the next aid payment was on track and by the decision by German Chancellor Angela Merkel to drop calls for a mandatory bond exchange that might lead credit rating companies to declare Greece unable to pay its bills.

Merkel’s June 17 concession gave a lift to stocks, bonds and the euro, spurring optimism that leaders would get ahead of the debt crisis that has exposed the weaknesses of Europe’s economic management.

Greek Bonds
Greek bonds reversed course today, with the 10-year yield rising 40 basis points to 17.34 percent. Greek bonds yield 14.41 percentage points more than 10-year German bonds, Europe’s safest investment. Standard & Poor’s on June 13 cut Greece by three levels to CCC, the world’s lowest debt grade.

Speculation that Greece will default has bled into other European markets, leading economists such as Nouriel Roubini to predict that the 17-nation euro, the high point of Europe’s economic integration, won’t survive in its current form.

“I don’t rule out that Greece and Portugal, if they aren’t able to recover competitiveness and growth and social tension further increases, may go back to the drachma and escudo on the wave of populist governments,” Roubini, head of Roubini Global Economics LLC, told Italy’s Il Sole 24 Ore on June 18.

Spanish Spread
Ireland and Portugal followed Greece in obtaining emergency loans in the past year. Spain’s finances came under the microscope last week, with investors pushing the extra yield on 10-year Spanish bonds to 261 basis points, the highest weekly close since January.

Moody’s Investors Service said June 17 it may cut its Aa2 rating on Italy, whose 2010 debt amounted to 119 percent of gross domestic product, Europe’s second highest after Greece.

Greece needs to cover about 4 billion euros of bills maturing between July 15 and July 22, and faces about 3 billion euros of coupon payments in the month, according to Bloomberg calculations. A bigger test comes on Aug. 20, when Greece must redeem 6.6 billion euros of maturing bonds.

The new Greek finance minister, Evangelos Venizelos, who was named in Papandreou’s cabinet overhaul three days ago, came to Luxembourg with a “strong commitment” to the planned 78 billion euros in cuts that provoked street protests last week.

“We can achieve our target thanks to the efforts of our people and thanks to the cooperation and the assistance of our partners,” Venizelos said.

More than 47 percent of 1,208 Greeks surveyed by Kapa Research SA for To Vima newspaper oppose the wage and spending cuts and higher taxes, and want early elections. Almost 35 percent said the package should be approved.

Rolling Blackouts
Fallout from the opposition to the government’s austerity plans may spill over into Greek living rooms today as workers at state-owned Public Power Corp SA hold rolling strikes to protest Papandreou’s pledge to speed the sale of the utility to meet the goal of raising 50 billion euros from asset sales by 2015.

Germany, which as Europe’s largest economy is the biggest guarantor of the aid packages to Greece, Ireland and Portugal, looked for evidence that Greece’s leaders are united behind an ambitious economic overhaul.

“If the Greeks can’t or don’t want to make the necessary decisions, then we can’t move forward on this track,” German Finance Minister Wolfgang Schaeuble told German radio. “Greece must first fulfill the conditions, then we can approve a new program so that payment of the tranche will be possible.”

Rollovers
The key plank of a second aid package would be a pledge by banks, insurance companies and asset managers to buy new Greek bonds to replace maturing ones, instead of European governments stepping in with taxpayers money.

In their statement, the ministers said the unlocking of fresh aid depends on working out “voluntary private sector involvement in the form of informal and voluntary rollovers of existing Greek debt at maturity.”

While Germany bowed to European Central Bank and French demands not to compel investors to buy new Greek bonds as old ones expire, the lines are blurry between a “voluntary” and “compulsory” rollover that would lead rating companies to declare Greece in default.

On the table are incentives for bondholders to maintain their exposure to Greece.

Bloomberg News

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