Euro Region Ministers Circle In on Greek Rescue as Crisis Disputes Linger

By Patrick Donahue - Feb 20, 2012 5:00 AM GMT+0700

European officials attempting to fend off the euro area’s first sovereign default will try to settle remaining disputes today as they close in on a 130 billion-euro ($170 billion) Greek bailout.

Finance ministers meet in Brussels at 3:30 p.m., joining Greece’s prime minister, Lucas Papademos, who arrived on the eve of the gathering. Their talks on his country’s second bailout in two years will aim to reconcile demands made on Greek leaders, a debt swap among private creditors, the role of the European Central Bank and concerns the measures won’t bear fruit.

European leaders including German Chancellor Angela Merkel want to wrest the common currency out of its crisis amid signs of improvement in the global economy. Focus has returned to Greece as the threat of economic collapse and exit from the euro has stoked officials’ concern such a scenario may provoke chaos.

“I don’t think there will be a majority to go down any other avenue” than a Greek bailout, Austrian Finance Minister Maria Fekter told state broadcaster ORF yesterday. Asked whether ministers will reach agreement, she said: “it looks like it.”

Should ministers fail to back the bailout package at their Brussels meeting, the issue could be pushed off to the next European Union summit on March 1. A disrupted schedule would threaten to spark unease among investors and reverse a decline in bond yields in indebted nations such as Italy and Spain.

Scope ‘to Disappoint’

Italian bonds rose for a sixth week last week, the longest run of gains since August 2006. The euro has climbed 1.6 percent against the U.S. dollar since the beginning of the year. In contrast, the yield on Greece’s 2022 bond climbed 60 basis points to 33.98 percent on Feb. 17.

“Deadlines are shifted and there is scope for events to disappoint,” Neil MacKinnon, a global macro strategist at VTB Capital in London and a former U.K. Treasury official, wrote in a note to clients yesterday.

Merkel, Papademos and Italian premier Mario Monti on Feb. 17 expressed confidence that ministers will resolve open questions, and Papademos flew to Brussels yesterday to facilitate discussions. International Monetary Fund Managing Director Christine Lagarde will also participate in the finance ministers’ talks, according to fund spokesman Gerry Rice.

Critical Talks

Papademos’s presence was deemed necessary because critical talks are under way with European agencies, the IMF and member states, requiring immediate coordination between Papademos and Finance Minister Evangelos Venizelos, according to a Greek finance ministry official. A final meeting with Greek government officials such as Papademos and Venizelos and the International Institute of Finance could also be required, the official said.

As the clock ticks toward March 20, when Greece is due to pay off 14.5 billion euros of maturing debt, euro region officials are scrambling to align competing schedules with a private-sector bond swap designed to slice about 100 billion euros off Greece’s debt.

Officials are targeting a window of Feb. 22 to March 9 to complete the swap transaction, German lawmakers were told during a briefing by government officials. The swap would then begin by March 8 at the latest and be completed by March 11, according to state-run Athens News Agency. Still, the exchange can only proceed once governments authorize funds to be used in cash or collateral as an incentive to investors.

ECB Role

Compounding the issue is the role of the ECB and the Greek bonds it has accumulated over the course of the crisis. The Frankfurt-based central bank is holding talks on exempting Greek bonds in national central banks’ investment portfolios from a debt restructuring, two euro-area officials said on Feb. 18.

The ECB is swapping its Greek bonds for new ones to ensure that it won’t be forced to take losses in any debt restructuring, three euro-area officials said on Feb. 16. The move may be completed today, the officials said.

Greece is drawing up legislation that could be used to impose losses on investors who don’t support the debt swap, according to two euro-region officials familiar with the situation. Finance ministers are prepared to back the use of so- called collective-action clauses if the voluntary swap doesn’t draw enough participation, one of the officials said.

Meanwhile, questions have swirled on whether austerity and outside financing measures being undertaken will manage to stave off a Greek collapse. The Greek economy shrank 7 percent in the fourth quarter from a year earlier as unemployment surged past 20 percent in November. The country’s output is forecast to shrink for the fifth straight year.

Debt Goals

Euro-area ministers heard on a Feb. 15 conference call that without further measures, Greece will miss debt-reduction goals. Outstanding debt would fall to 129 percent of gross domestic product in 2020, missing a targeted 120 percent, according to three people familiar with the talks.

German Finance Minister Wolfgang Schaeuble signaled flexibility on the target, saying in Stuttgart on Feb. 17 that “the 120 percent may be 122 percent or 123 percent, it mustn’t be 130 percent.”

Before he flew to Brussels, Papademos signaled his government had identified the cuts necessary to lower spending by 325 million euros, offering more guarantees that Greece will fulfill its side of the bargain.

“A euro exit by one member could fundamentally change the nature of the euro as an irreversible currency and spark an unprecedented run on banks and sovereigns,” Joachim Fels, chief economist at Morgan Stanley, wrote in a note to clients yesterday.

To contact the reporter on this story: Patrick Donahue in Berlin at at pdonahue1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net