By Paul Tugwell and Tony Czuczka - Feb 19, 2012 3:37 PM GMT+0700
Prime Minister Lucas Papademos said Greece found all the extra cuts needed to lower spending by 325 million euros ($427 million) to secure a bailout aimed at averting the region’s first sovereign default.
The government identified “a series of additional measures amounting to 125 million euros in order to complete the package of budget cuts worth 325 million euros,” Papademos told ministers at a meeting of the Cabinet in Athens yesterday, according to an e-mailed transcript.
Finance ministers from all 17 euro-area countries meet in Brussels tomorrow as governments close in on a deal to unlock a 130 billion-euro aid package for Greece, the second such international bailout of the country in two years. Germany, the biggest country contributing to euro-area rescues, signaled last week that ministers may be ready to back the plan.
The steps, which Greece has agreed in principle with the International Monetary Fund, the European Union and the European Central Bank will lead to a permanent cut in government spending and a narrower deficit, Papademos said.
Greece has been struggling to give assurances on debt- reduction goals through the end of the decade, heightening uncertainty as the clock ticks toward a March 20 bond redemption, when it must pay 14.5 billion euros or trigger the first default in the euro’s 13-year history. Tomorrow’s gathering of ministers is due to start at 3:30 p.m. instead of the usual 5 p.m.
Avoid Split
After a week of wrangling among euro-area officials, Chancellor Angela Merkel’s government indicated it aims to avoid splitting the timetable for providing aid and for a writedown of Greek debt to private bondholders and to agree to the deal as one package.
“The ongoing saga will likely go down to the wire and is, yet again, another reminder of the fragile nature of the state of affairs in Europe and the potential for a disorderly default,” Michael Gapen, a New York-based economist at Barclays Capital, said in a note.
Germany has led pressure on Papademos to enforce austerity, stoking recrimination between Europe’s southern countries and their northern creditors. Greece’s economy, stuck in what is predicted to be a fifth year of recession, shrank 7 percent from a year earlier in the fourth quarter as unemployment climbed to 20.9 percent in November.
‘Unique Case’
“Greece is really a unique case and we need to avoid first of all that it exits the euro,” Maria Cannata, Italy’s director of public debt, said late yesterday at an event in Parma, Italy. “Then we need to find a solution which is as painless as possible and we need to send the message that the contagion has been stopped and that Greece is Greece and it isn’t Portugal nor Ireland, let alone Spain or Italy.”
Papademos said yesterday that though cuts in pensions could not be avoided, the impact is “‘milder’’ than it appears. A person getting a monthly pension of 1,500 euros will face a reduction of 12 percent on the amount above 1,300 euros, leading to a loss of 24 euros.
In focus over the weekend will be the role of the ECB, as it holds talks on exempting Greek bonds in national central banks’ investment portfolios from a debt restructuring, two euro-area officials said.
Second Bailout
Investors anticipating a conclusion of the seven-month effort to complete the second bailout for Greece sent the euro and global stocks higher last week. The euro gained as much as 0.5 percent against the dollar on Feb. 17.
‘‘Monetary policy alone cannot resolve the crisis,’’ ECB council member Ignazio Visco said at an event in Parma, Italy, yesterday, when calling on governments to lower their budget deficits. ‘‘The threat of dangerous contagion must be definitively dispelled by resolving the problem of Greece.’’
Merkel, Papademos and Italian Prime Minister Mario Monti discussed plans for the Greek bailout in a conference call on Feb. 17 and were confident that ministers will ‘‘find a solution to open questions’’ when they meet in Brussels, Steffen Seibert, Merkel’s chief spokesman, said in a statement.
While Greek lawmakers this month passed austerity measures that are required for the aid, the euro-area ministers heard on a Feb. 15 conference call that Greece would miss debt-reduction goals without further measures.
Greek Debt
Greece’s debt would fall to 129 percent of gross domestic product in 2020, missing a target of 120 percent, said three people familiar with the talks, who declined to be named because they are still in progress. Last year, the level was about 160 percent.
Germany’s Die Welt newspaper reported yesterday that Greece may cut its debt to less than 125 percent of GDP by 2020, citing unidentified people involved in the discussions.
German Finance Minister Wolfgang Schaeuble signaled flexibility on that target, saying in Stuttgart on Feb. 17 that ‘‘the 120 percent may be 122 percent or 123 percent, it mustn’t be 130 percent.”
“It will definitely take until Sunday night” to resolve the outstanding questions, Finance Ministry spokesman Martin Kotthaus told reporters in Berlin.
Keeping the bond swap on track may hinge on the ECB. The bank is swapping its Greek bonds for new ones to ensure it isn’t forced to take losses in any debt restructuring, three euro-area officials said on Feb. 16. The move may be completed by Feb. 20, the officials said.
‘Positive Outcome’
That could pave the way for a private-sector bond swap that aims to slice about 100 billion euros off Greece’s debt alongside the second bailout. More controversial is the proposal for national central banks to take part in the private exchange by accepting losses on Greek bonds in their portfolios.
“Markets are likely anticipating a positive outcome with voluntary participation of the private sector and possibly some ECB involvement,” Silvio Peruzzo, an economist at Royal Bank of Scotland in London, said by e-mail. Even so, “Greece is likely to remain a key risk for the euro area as the implementation of the program feeds the theme of exit from the monetary union.”
ECB Executive Board member Peter Praet said in an interview with De Tijd and L’Echo newspapers published yesterday that the central bank can’t participate in a private-sector debt writedown of Greek assets. Greece’s austerity plan is “feasible,” he said.
Swap Transaction
Euro 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 begin by March 8 at the latest and be completed by March 11, the state-run Athens News Agency reported.
The Greek government is meanwhile 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. The law may be introduced to parliament in Athens in the coming days, said one of the officials. Finance ministers are prepared to back the use of so- called collective-action clauses if the voluntary swap doesn’t draw enough participation, the other person said.
The bond exchange can only go ahead once governments authorize the European Financial Stability Facility to provide 30 billion euros, to be used in cash or collateral as an incentive to investors.
With Greece’s ability to honor its debt-cutting pledges still in question, finance ministers may again withhold approval of the bailout even if they back the bond exchange, Citigroup Global Markets analysts said. That would push the dispute closer to a March 1-2 summit of European leaders.
Holding back euro-area policy makers is “widespread skepticism about the credibility of Greece’s political system as a whole and its ability to implement what has already been agreed,” according to Nomura Global Economics analysts.
To contact the reporters on this story: Paul Tugwell in Athens at ptugwell1@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net
To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net
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