Europe ’Plays With Fire’ as Greek Rescue Hits Barrier

By James G. Neuger and Eleni Chrepa - Feb 15, 2012 9:48 PM GMT+0700

Greece said that Europe’s wealthier countries are “playing with fire” by toying with the idea of expelling it from the 17-nation euro area as talks over a second aid program ran into new obstacles.

Finance Minister Evangelos Venizelos leveled the accusation after a decision slated for tonight on aid totaling 130 billion euros ($171 billion) was postponed until at least Feb. 20 and possibly until after a full-time Greek government emerges from elections later in the year.

“We are continually faced with new terms,” Venizelos told reporters in Athens today. “In the euro area, there are plenty who don’t want us anymore. There are some playing with fire, domestically and abroad. Some are playing with torches and some are playing with matches. But the risk is equally great.”

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 market tumult.

Tonight’s euro finance meeting was canceled late yesterday and replaced with a conference call at 5 p.m. Brussels time. Luxembourg Prime Minister Jean-Claude Juncker, chairman of the euro panel, now targets a Greek aid decision at the previously scheduled Feb. 20 meeting.

‘Very Strict’ Conditions

“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. She spoke of “very strict” attitudes in creditor countries.

The official loans, supplemented by about 100 billion euros of debt relief from private bondholders, have been in the works since July. Each day lost brings Greece closer to a March 20 bond redemption when it must come up with 14.5 billion euros or become the first country in the euro’s 13-year history to default.

The postponement is “very worrying” and “reflects a growing concern among some euro-area countries that Greece will not abide by the conditions of the second bailout package,” said Nicola Mai, an economist at JPMorgan Chase (JPM) Bank in London. “It appears that some euro-area countries are willing to let Greece default.”

Tensions over Greece pushed the euro down 0.2 percent to $1.3105 at 3:25 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 today, selling debt maturing in up to 12 months after increasing the amount to meet investor demand.

Greek Cuts

Greece’s caretaker Cabinet, led by Prime Minister Lucas Papademos, yesterday met Europe’s demand for 325 million euros in savings by making cuts to defense, public investment and local authorities, two government officials said.

The head of Greece’s second-biggest political party, New Democracy’s Antonis Samaras, sought to meet a second demand today by providing a signed pledge to back the “objectives, targets and key policies” of the austerity program.

Samaras, seeking early April elections, left open the possibility of “modifications” to Greek policies to promote growth. The head of the rival socialist party, former Prime Minister George Papandreou, dispatched his own written pledge, NET TV reported.

Greece has depleted its credibility by missing targets for deficit reduction, economic reforms and 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.

‘Horror Movie’

“We cannot give anyone a pretext or motive to apply such a scenario that would prove to be a horror movie not just for Greece but for the world economy,” said Venizelos.

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.

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.

Central bankers have agreed “that we don’t wish to make a profit on Greece,” ECB council member Luc Coene of Belgium said Feb. 13 in remarks that were embargoed until today. “So when we distribute profit from a given year to the Belgian state, we will provide a breakdown of what’s due to Greece and it’s then up to the government to decide how to use it.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Eleni Chrepa in Athens at echrepa@bloomberg.net

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