Greece Struggles to Win Aid Package

By James G. Neuger - Feb 15, 2012 6:01 AM GMT+0700

European officials ratcheted up the pressure on the Greek government to deliver budget cuts in exchange for a second bailout as they insisted that default is not an option.

Finance ministers canceled a Brussels meeting slated for today and will hold a teleconference instead to prod Greece to do more to clinch an aid package worth 130 billion euros ($170 billion) along with about 100 billion euros of debt relief from private bondholders. Greece needs the aid to make a 14.5 billion-euro bond payment on March 20.

“The risk of a disorderly default has risen,” Thomas Costerg, a London-based economist at Standard Chartered Bank, said yesterday in an e-mail. “The timetable is already over- stretched to cover the March redemption and gives no room for maneuver or additional delay. The question remains whether we have reached the point of no return for Greece. I don’t think it’s the case yet, but we’re dangerously close to it.”

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.

“The decision was the result of an evaluation by the head of the eurogroup, Jean-Claude Juncker, that there weren’t sufficient elements of consensus to be sure that a meeting would be successful,” Italian Prime Minister Mario Monti said late yesterday on Sky Italy Television.

Greek Pledges

After Juncker cancelled the gathering, citing the lack of political assurances from Greek leaders to stick to austerity pledges, a government official in Athens said the leaders of Greece’s two biggest political parties, New Democracy’s Antonis Samaras and Pasok’s George Papandreou, will today provide the written commitments demanded.

The euro erased a loss of as much as 0.8 percent on the news of the Greek politicians’ pending promises. The currency traded at $1.3129 at 5:55 p.m. in New York.

Meantime, evidence mounted that the euro’s guardians have made progress ring-fencing Greece’s woes. Italy yesterday sold 6 billion euros of bonds at lower borrowing costs as investors shrugged off a downgrade of its credit rating by Moody’s Investors Service.

Speaking on ZDF television, German Finance Minister Wolfgang Schaeuble said Feb. 13 that if efforts to prop up Greece come to naught, “we’re better prepared than two years ago.”

Bailout Limit

Finance Minister Jan Kees de Jager of the Netherlands, one of four AAA rated states left in the euro area, pushed back against suggestions from Athens that the aid bill will be 15 billion euros higher than planned.

“We agreed upon 130 billion,” De Jager told Dutch RTL television yesterday. “If now it seems more is needed, we should explore other ways.”

Greece’s prospects hinged on Prime Minister Lucas Papademos’s Cabinet finding 325 million euros of the extra budget cuts demanded by European governments and the International Monetary Fund as conditions for fresh loans.

The Cabinet late yesterday agreed to trim pensions at state-owned companies and banks by 300 million euros, according to an official who declined to be named. Parties backing Papademos’s interim government also need to endorse the savings.

Creditor governments also want Greece’s feuding political parties to pledge planned cuts in writing, no matter who takes power in elections due in coming weeks.

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.

Euro Exit

As a result, the once-taboo notion of a departure or expulsion from the euro zone has crept into the mainstream political debate.

“If they don’t do this, they exclude themselves from the euro zone and the impact on the other countries now would be less important than maybe a year ago,” Luxembourg Finance Minister Luc Frieden said at the Atlantic Council in Washington this week.

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.

ECB Holdings

“These bonds were acquired at an average price that is below face value,” ECB Executive Board member Benoit Coeure told Liberation newspaper in an interview published yesterday. “If there is a profit, as with all monetary holdings, it should be distributed to the states. They can use it to contribute to sustainability of Greece’s debt.”

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.

Representatives of Greece’s private creditors had planned to travel to Brussels in expectation of progress on the “voluntary” debt-relief accord that was another condition for the official aid.

“Policy makers are still scrambling, and markets have gotten used to it, but there is still a general feeling that the Greece situation will not have a happy ending regardless of what they agree to,” said Jay Mueller , who manages about $3 billion of bonds at Wells Fargo (WFC) Capital Management in Milwaukee.

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