Germany Says Greece Missing Debt Targets in Fresh Aid Rebuff

By Brian Parkin and Simon Kennedy - Feb 10, 2012 5:32 PM GMT+0700

Greece is missing its debt-cutting targets, German Finance Minister Wolfgang Schaeuble told lawmakers today, intensifying pressure on Greek politicians to deliver on austerity promises.

Schaeuble said in Berlin that Greece’s plans would leave its debt as high as 136 percent of gross domestic product by 2020, according to two people who took part in the meeting and who spoke on condition of anonymity because it was private. That compares with the 120 percent foreseen in a 130 billion- euro ($172 billion) bailout being negotiated.

Signs that Greece is falling short underscored euro-area officials’ frustration with the country’s bickering leaders and the prospect that they may again backtrack on fiscal pledges not first passed into law. Greek lawmakers begin voting on austerity measures this weekend after European finance ministers last night held back the rescue package demanding further commitments from Athens.

“The Greek offer is not sufficient and they have to go away to come up with a revised plan,” Bertrand Benoit, a spokesman for the German Finance Ministry in Berlin, said by telephone today.

The emergency talks of finance chiefs broke up late last night with Luxembourg Prime Minister Jean-Claude Juncker saying Greece must turn its latest budget-cutting plan into law, flesh out 325 million euros in spending reductions and have its major party leaders sign up to the program so they don’t retreat after upcoming elections.

Juncker’s Condition

“In short: no disbursement without implementation,” Juncker said. He set another extraordinary meeting for Feb. 15. “We can’t live with this system while promises are repeated and repeated and repeated and implementation measures are sometimes too weak,” he said.

The impasse left European stocks falling for the fourth time in five days and the euro declining from yesterday’s two- month high against the dollar.

Facing general strikes and mounting opposition to cuts in wages, pensions and government spending, Greek Finance Minister Evangelos Venizelos said the parliamentary vote set to begin this weekend amounted to a ballot on euro membership.

“If we see the salvation and future of the country in the euro area, in Europe, we have to do whatever we have to do to get the program approved,” Venizelos said in Brussels.

Resolution of the aid talks, which have dragged on since July, would allow Greece to make a 14.5 billion-euro bond payment on March 20 and contain the threat that speculators will target debt-saddled nations including Italy and Portugal.

Default Risk

Fitch Ratings today reiterated its view that Greece will default even with the rescue package.

Greece “must get this deal agreed really within the next few days to enable them sufficient time and have the new bailout money disbursed before that bond is due,” Tony Stringer, Fitch’s managing director of global sovereigns, said in an interview in Singapore. “If they don’t manage to achieve that, then it could be in the realm of a disorderly default.”

Europe’s hardline stance follows more than two years in which Greece repeatedly failed to carry through promised reforms to tackle its uncompetitive economy and meet the terms for aid. Greece blamed its shortcomings on a deeper than first expected slump which is now set to worsen with reports yesterday showing unemployment jumping to 20.9 percent in November and industrial production declining.

Greek Talks

Negotiations over another bailout began seven months ago and Greece’s participation in the euro first came into question when then-Prime Minister George Papandreou threatened in October to hold a referendum on austerity.

In contrast to the approach to Greece, Germany may be willing to study revising the terms of Portugal’s bailout, Schaeuble told his Portuguese counterpart in Brussels in a conversation picked up by Portuguese television.

Germany will “be ready” for an adjustment of the Portuguese program if needed, Schaeuble told Finance Minister Vitor Gaspar at the meeting yesterday.

The gathering, attended by International Monetary Fund chief Christine Lagarde and European Central Bank President Mario Draghi, came hours after Greek Prime Minister Lucas Papademos and party chiefs ended a week of meetings with an agreement on a package of fresh budget cuts.

Greece is seeking to reduce its debt to 120 percent of gross domestic product by 2020 from 160 percent last year. The latest measures are aimed at delivering budget reductions totaling 1.5 percent of GDP this year and range from a 20 percent paring of the minimum wage to lower pension payments and immediate job cuts for as many as 15,000 state workers.

ECB Pressure

With European officials signaling investors will soon accept a debt swap that would impose losses of about 70 percent of their Greek bond holdings, the European Central Bank came under pressure to offer additional relief.

“The ECB must look, within the framework of its independence, what sort of contribution it can make,” Juncker said.

Draghi yesterday left open the possibility of passing up some the profits on the Greek bonds the central bank bought during the crisis. He nevertheless rejected selling them to Europe’s temporary bailout fund at a loss because doing so would amount to “monetary financing” of governments, which is banned by European treaties.

Bondholders Meet

Bondholders met in Paris yesterday to discuss accepting an average coupon of as low as 3.6 percent on new 30-year bonds in the proposed debt swap. An agreement would slice 100 billion euros off more than 200 billion euros of privately-held debt and a formal offer must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due.

European Union Economic and Monetary Affairs Commissioner Olli Rehn said the deal is “practically finalized.” The Institute of International Finance, which represents investors, said it welcomed progress made by Greece and look forward to the debt swap being completed next week.

“The Greeks understand that it’s not five minutes to midnight but 30 seconds to midnight,” Luxembourg Finance Minister Luc Frieden said.

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Simon Kennedy in London at skennedy4@bloomberg.net

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