Europe Demands More Greek Budget Controls

By James G. Neuger - Feb 16, 2012 6:01 AM GMT+0700

Europe’s creditor countries struggled to bridge divisions over a rescue of Greece, seeking more control over how future aid is spent as the clock ticked toward a possible default next month.

In a replay of the brinkmanship that marked the early stages of the Greek crisis two years ago, euro-area finance ministers extracted concessions from political leaders in Athens intended to pave the way for the endorsement of a 130 billion- euro ($171 billion) aid package next week.

While “further considerations are necessary regarding the specific mechanisms to strengthen the surveillance of program implementation,” Europe is set to make “all the necessary decisions” on Feb. 20, Luxembourg Prime Minister Jean-Claude Juncker said in an e-mailed statement after chairing a conference call of finance chiefs late yesterday.

Greece’s plea for more aid on top of the 110 billion euros awarded in 2010 has stirred recriminations on both sides of Europe’s north-south economic divide, with taxpayers in better- off countries rebelling against further handouts. Each day lost brings Greece closer to a March 20 bond redemption when it must make a 14.5 billion-euro payment or become the first country in the euro’s 13-year history to default.

Greece made “substantial further progress” by outlining 325 million euros in additional savings and providing written pledges from the leaders of its two main parties not to backslide on the budget cuts, Juncker said.

Meeting Conditions

Greece has now met all conditions set by the European Union and International Monetary Fund for the lifeline, Finance Minister Evangelos Venizelos told reporters in Athens after the 3 1/2-hour telephone consultations.

Before the call, Finland and the Netherlands had appealed for the postponement of a new program until elections as early as April produce a full-time Greek government that replaces the caretaker administration, one European official said. In that scenario, the euro area would arrange a bridge loan to get Greece past the March payment, the official said.

“Ultimately the question is whether Greece has political will to sort out their economy and fulfill the conditions,” Finnish Finance Minister Jutta Urpilainen told reporters in Helsinki yesterday.

Juncker’s post-call statement didn’t address the question of a possible interim loan. It indicated that there is no accord yet on a proposal to set up an escrow account to ensure that the aid money goes to paying creditors.

Ring-Fencing

Tensions over Greece pushed the euro down 0.5 percent to $1.3065 at 10:15 p.m. in Brussels. Meantime, evidence mounted that the euro’s guardians have made progress ring-fencing Greece’s woes. Portugal raised 3 billion euros yesterday, selling debt maturing in up to 12 months after increasing the amount to meet investor demand.

A delayed decision on public support for Greece until after the still-unscheduled election would risk snagging a separate component of the package: a bond exchange by private investors designed to wipe 100 billion euros off of Greece’s debt.

While some German finance officials see the merits of putting back approval of a multi-year aid program until after the Greek election, Chancellor Angela Merkel hasn’t made her stance clear yet, the European official said.

Merkel’s Concern

Buoyed by an uptick in opinion polls, unemployment at a two-decade low of 6.7 percent and European backing for a German- designed fiscal discipline treaty, Merkel has warned in recent weeks of the risks of letting Greece default or pushing it out of the euro.

The leader of Europe’s dominant economy is also under pressure from Italy’s new prime minister, Mario Monti, who has emerged as the spokesman for economically depressed southern European countries struggling against German-imposed austerity.

A former European commissioner who leads an interim government in Rome, the nonpartisan Monti said Greece is being put under unbearable strains and traced the origins of the crisis to moves by prior German and French leaders to soften the euro’s deficit rules.

“The very tough approach being taken toward Greece today may lead us to regard this as being excessive, and it probably is,” Monti told the European Parliament in Strasbourg, France yesterday. “There are no good guys and bad guys. We all need to feel jointly responsible.”

Sarkozy’s Campaign

By twinning fiscal savings with an economic overhaul in Italy, Monti has earned respect in Germany just as Merkel’s chief crisis-management partner, French President Nicolas Sarkozy, plunges into a reelection campaign that polls indicate he will lose.

Greece has squandered credibility by missing targets for deficit reduction, economic reforms and asset sales that were set for the first aid package. As a result, the once-taboo notion of a departure or expulsion from the euro has crept into the mainstream political debate.

In Athens, political leaders responded with alarm to the threats from northern Europe. Early yesterday, Venizelos said wealthier countries are “playing with fire” by toying with the idea of booting Greece out of the euro.

The head of Greece’s second-biggest party, New Democracy’s Antonis Samaras, was dragged into another German-Greek spat when he was blamed by German Finance Minister Wolfgang Schaeuble for holding up economic reforms.

Papoulias’s Pushback

Samaras was defended by Karolos Papoulias, Greece’s largely ceremonial president, a veteran of the anti-Nazi resistance during World War II.

“I don’t accept the ridiculing of my country by Mr. Schaeuble,” the 82-year-old Papoulias said in Athens. “I don’t accept it as a Greek. Who is Mr. Schaeuble to ridicule Greece? Who are the Dutch? Who are the Finns? We always had the pride to defend not just our own freedom, not just our own country, but the freedom of all of Europe.”

In solidarity with 11 million Greeks reeling from two years of spending cuts and tax increases, Papoulias said he would work for free, giving up an annual salary estimated by Bloomberg at 300,000 euros.

To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net

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