EU Confronts Deteriorating Greek Economy as Six-Day Crisis Marathon Starts

By James G. Neuger and Stephanie Bodoni - Oct 22, 2011 1:01 AM GMT+0700

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Oct. 21 (Bloomberg) -- Christina Romer, former head of President Barack Obama's Council of Economic Advisers and a Bloomberg contributing editor, Arnab Banerji, chief investment officer at Collabrium Capital, Dan Wiener, chief executive officer at Adviser Investments, and Daron Acemoglu, professor of economics at the Massachusetts Institute of Technology, talk about the European sovereign debt crisis. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

European finance ministers grappled with an assessment that Greece’s economy is deteriorating as they began a six-day battle to stave off a default and shield banks from the fallout.

A review by European and International Monetary Fund experts showed Greek bond writedowns of 60 percent and more official aid would still leave the country with a debt load bigger than its annual economic output by 2020.

Finance ministers braced for “tough” talks at a crisis- management marathon running until Oct. 26, as pressure mounted to stamp out debt woes that threaten to infect the global economy. Aid of 256 billion euros ($354 billion) for Greece, Ireland and Portugal have failed to stabilize markets or prevent the turmoil spreading to France, co-anchor with Germany of the European economy.

Europe’s international image is “disastrous,” Luxembourg Prime Minister Jean-Claude Juncker told reporters before the Brussels meeting. “We’re not really giving a great example of a high standing of state governance.”

Juncker, chairing today’s talks, cancelled the normal post- meeting press conference. Finance ministers from all 27 European Union countries meet tomorrow. EU and euro-area leaders gather on Oct. 23, to be capped by another euro summit on Oct. 26.

The negotiations “will be tough and the situation is serious,” Dutch Finance Minister Jan Kees de Jager said. “We really need to step up efforts, make extra reforms, extra cuts and strict agreements on budgets.”

Stocks, Euro

European and U.S. stocks, the euro, and bonds of struggling countries rose today on speculation that European leaders will find a cure. The Stoxx Europe 600 Index advanced 2.5 percent. The euro added 0.7 percent to $1.3877.

With President Barack Obama stressing the “urgency” of a fix, the search for solutions was snagged by a falling-out between Germany and France, the tandem at the heart of the crisis response ever since the new Greek government discovered a wider-than-expected budget hole in October 2009.

With French bond premiums at euro-era highs, French President Nicolas Sarkozy is campaigning for a European Central Bank role in boosting the firepower of the 440 billion-euro rescue fund, a measure opposed by Germany.

German Finance Minister Wolfgang Schaeuble denied a Berlin- Paris rift, saying Germany pushed back decisions originally slated for Oct. 23 to give the government time to consult lawmakers.

‘Not Stuck’

“France and Germany are not at all stuck in their positions,” Schaeuble said.

Seven options are on the table for leveraging the fund, known as the European Financial Stability Facility. Germany and the ECB have ruled out granting it a banking license, the most potent option.

“New ones are coming into the process because smart people are looking for creative options,” Austrian Finance Minister Maria Fekter said in an interview. “None of the models are amazingly better than the others.”

One way under consideration to break the deadlock is by keeping the EFSF going instead of replacing it with a planned permanent fund, two people familiar with the discussions said yesterday.

The resulting combination of the EFSF and 500 billion-euro European Stability Mechanism would deliver 940 billion euros to impress the markets, the people said. A consensus is emerging to start the ESM in mid-2012, a year ahead of schedule, they added.

‘Turn for the Worse’

The meeting’s start was overshadowed by the report by the European Commission, ECB and IMF that pointed to “a turn for the worse” in Greece.

Divisions over the handling of Greece were thrown into relief by the report, which was obtained by Bloomberg News. It contained a footnote that the ECB, which has lobbied against writedowns, “does not agree” with the inclusion of the bond- loss scenarios.

Officials are considering five scenarios to update a July agreement that foresaw 21 percent losses on Greek debt for private bondholders, people familiar with the deliberations said. They range from sticking with a voluntary swap to a so- called hard restructuring that forces investors to exchange Greek bonds for new ones at 50 percent of their value, the people said.

Greek Needs

A deepening recession and delays in enacting budget cuts have raised Greece’s financing needs by at least 20 billion euros since July, when euro leaders hammered out a 159 billion- euro package, the people said.

“Given still-delayed market access, large scale additional official financing requirements would remain, estimated at some 114 billion euros,” according to the auditors’ report, dated today. “To get the debt down further would require a larger private sector contribution” of at least 60 percent to reduce debt below 110 percent of gross domestic product by 2020.

The government in Athens forecasts the debt load next year at about 172 percent of GDP.

“The situation in Europe is very difficult,” Finnish Finance Minister Jutta Urpilainen said. “Our meeting tonight will be also difficult.”

The ministers signed off on on the payout of its 5.8 billion-euro share of an 8 billion-euro loan to Greece. It’s the sixth installment of a 110 billion-euro package awarded in May 2010.

Greek lawmakers clinched that payment by passing fresh austerity measures yesterday, as hooded protesters threw rocks and battled riot police outside the parliament in Athens.

The skepticism outside Europe of a soft landing for Greece was captured by Brazilian Finance Minister Guido Mantega. Speaking in Campinas, Brazil, today, Mantega said “the numbers still won’t add up. A restructuring of Greek debt is inevitable. The debt is very big to be sustainable.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net Stephanie Bodoni in Brussels at sbodoni@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net