European officials jacked up the pressure on the Greek government to deliver budget cuts in exchange for a second bailout as they insisted that default is not an option.
Finance ministers canceled a Brussels meeting slated for tomorrow and will hold a teleconference instead to prod Greece to do more to clinch an aid package worth 130 billion euros ($170 billion) along with roughly 100 billion euros of debt relief from private bondholders.
“I did not yet receive the required political assurances from the leaders of the Greek coalition parties on the implementation of the program,” Luxembourg Prime Minister Jean- Claude Juncker, chairman of the euro finance panel, said in a statement today. He also pressed for “further technical work” on Greek budget cuts.
Two years after pledging to pull Greece back from the brink, European leaders are torn between pouring more aid into the struggling economy or risking an unprecedented national bankruptcy that might force the country out of the euro and prompt renewed tumult in European markets.
Finance ministers will discuss “outstanding issues” tomorrow and hold their next meeting as scheduled on Feb. 20, Juncker said. The postponement pushed the euro down to $1.3115 at 7 p.m. Brussels time from $1.3150 earlier.
Evidence mounted today that the euro’s guardians have made progress isolating Greece’s woes. Italy sold 6 billion euros of bonds at lower borrowing costs as investors shrugged off a downgrade of its credit rating by Moody’s Investors Service.
“Policy makers are still scrambling, and markets have gotten used to it, but there is still a general feeling that the Greece situation will not have a happy ending regardless of what they agree to,” said Jay Mueller , who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.
Finance Minister Jan Kees de Jager of the Netherlands, one of four AAA rated states left in the euro area, pushed back against suggestions from Athens that the aid bill will be 15 billion euros higher than planned.
“We agreed upon 130 billion,” De Jager told Dutch RTL television today. “If now it seems more is needed, we should explore other ways.”
Greece’s prospects hinged on Prime Minister Lucas Papademos’s Cabinet finding 325 million euros of the extra budget cuts demanded by European governments and the International Monetary Fund as conditions for fresh loans.
By early evening, the Cabinet agreed to trim pensions at state-owned companies and banks by 300 million euros, according to an official who declined to be named. Parties backing Papademos’s interim government also need to endorse the savings.
Creditor governments also want Greece’s feuding political parties to pledge planned cuts in writing, no matter who takes power in elections due in coming weeks. Greece needs the aid to enable it to make a 14.5 billion-euro bond payment on March 20.
“We should soon be able to decide on a new, second program for Greece,” European Union Economic and Monetary Commissioner Olli Rehn told reporters today in Strasbourg, France. “It is really in the interest of everybody now -- in Greece and in Europe -- to make this work and avoid a disorderly default.”
Greece has depleted its credibility by missing targets for deficit reduction, economic reforms and state-asset sales that were set when it obtained a 110 billion-euro aid package in May 2010.
As a result, the once-taboo notion of a departure or expulsion from the euro zone has crept into the mainstream political debate.
“If they don’t do this, they exclude themselves from the euro zone and the impact on the other countries now would be less important than maybe a year ago,” Luxembourg Finance Minister Luc Frieden said at the Atlantic Council in Washington yesterday.
Speaking yesterday to ZDF television, German Finance Minister Wolfgang Schaeuble said that if efforts to prop up Greece come to naught, “we’re better prepared than two years ago.”
Also unclear was whether the European Central Bank, buyer of 219.5 billion euros of weaker countries’ bonds in the past two years, would contribute to debt relief in the new package.
Euro statutes bar the central bank from financing governments. One workaround would be for the ECB to funnel profits from its Greek holdings back through its national branches to euro governments.
“These bonds were acquired at an average price that is below face value,” ECB Executive Board member Benoit Coeure told Liberation newspaper in an interview published today. “If there is a profit, as with all monetary holdings, it should be distributed to the states. They can use it to contribute to sustainability of Greece’s debt.”
The central bank probably spent about 47 billion euros to buy Greek bonds with a face value of 60 billion euros, yielding potential profits of 13 billion euros, according to Juergen Michels, chief European economist at Citigroup in London.
“But the procedure leaves open questions,” Michels said in an e-mailed note. “It remains unclear when the ECB will distribute the expected future profits. Hence the immediate impact on Greek debt will be small.”
Representatives of Greece’s private creditors had planned to travel to Brussels in expectation of progress on the “voluntary” debt-relief accord that was another condition for the official aid.
There was no immediate reaction from the Institute of International Finance, the bank association acting on behalf of bondholders, to the ministers’ decision to hold a conference call instead.