By Natalie Weeks, Maria Petrakis and Marcus Bensasson - Feb 6, 2012 7:11 AM GMT+0700
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Discussions in Athens between Prime Minister Lucas Papademos, Finance Minister Evangelos Venizelos and Charles Dallara, the managing director of the Washington-based Institute of International Finance, a group representing Greece’s bank creditors, will resume on Jan. 18 as more work is needed after today’s second day of consultations, according to a Greek Finance Ministry official who declined to be identified. Photographer: Kostas Tsironis/Bloomberg
Greek Prime Minister Lucas Papademos secured a general agreement on budget-cutting measures demanded by international creditors amid continued concern that political leaders may object to some of the points needed for the 130 billion-euro ($171 billion) rescue package.
Leaders of the three political parties supporting Papademos’s interim government agreed with him in a five-hour meeting yesterday to make additional reductions this year equal to 1.5 percent of gross domestic product, according to an e- mailed statement from the premier’s office in Athens. The four men also agreed on a framework for bank recapitalizations, ensuring the viability of auxiliary pension funds and for measures to reduce wage and non-wage costs to boost competitiveness.
The accord marked a step forward in a series of tense negotiations in Athens over the weekend. With the country’s stability at stake, Papademos is racing to clinch agreement on a plan that’s been in the works since July, with talks between international monitors and Greek officials running at the same time as discussions among the prime minister’s coalition members and Greece’s government and its private creditors.
Papademos will meet with the three party leaders today to hammer out the details of the measures after imposing an 11 a.m. deadline for proposals. Antonis Samaras, the head of the second- biggest party, New Democracy, indicated he would oppose some of the measures which the so-called troika of international creditors have put forward.
Samaras’s Concerns
“They are asking us for greater recession, which the country can’t take,” Samaras said as he left the meeting with Papademos. “I will fight to avoid that.”
Greece’s efforts to win a second bailout from the so-called troika -- the European Commission, the European Central Bank and the International Monetary Fund -- have hung in the balance over the past three days as negotiations in Athens failed to clinch an agreement. Greek Finance Minister Evangelos Venizelos said on Feb. 4 the talks were “on razor’s edge.”
Facing a 14.5 billion-euro bond payment on March 20 and general elections as soon as April, Papademos must heed international demands for greater austerity to complete the talks on a second aid package in time. Open questions involve how much more aid Greece needs, how much more austerity is required, and how to involve the European Central Bank in the private-sector creditor debt swap.
Next Election
Guarantees from Greek political leaders such as Samaras, who leads in opinion polls, are key to securing the funds from the EU and IMF. International lenders want assurances that whoever wins the next election, which could be held in April, will stick to pledges made now to receive financing.
George Papandreou, the former prime minister who still leads the Pasok socialist party, the biggest in the Greek parliament, met with party members after the meeting to discuss the party’s response.
In a letter sent separately to Papademos, he proposed that Papademos’s mandate be extended to boost confidence among lenders the pledges will be implemented. That is an option likely to be opposed by Samaras, who has called for elections as soon as the new financing is agreed.
Agreement on a new plan, which includes a writedown of Greek debt held by private creditors, has been held up by insistence on the part of the EU and IMF on structural reforms that will underpin a return to competitiveness for the Greek economy as well as new fiscal measures for this year.
Rescue Blueprint
The rescue blueprint includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and loans that will probably exceed the 130 billion euros now on the table. A formal offer for the debt swap must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due.
“One thing is clear: the Greek drama continues to unfold,” Joachim Fels, chief economist at Morgan Stanley wrote in a note yesterday. “A really, really bad scenario for the euro area -- a Greek default and departure from the euro area -- simply cannot be excluded.”
Deutsche Bank AG Chief Executive Officer Josef Ackermann said on Feb. 4 a collapse of Greece’s economy would open a “Pandora’s box” that would kill a euro-area recovery.
Lagged Behind
Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid and hastening a German push to make bondholders contribute. The country’s economy shrank 6 percent last year, according to the most recent IMF estimates, the budget deficit is still close to 10 percent of GDP and unemployment is about 18 percent.
Even after a second bailout, Greece may be saddled with too much debt, too little growth and too large a budget hole to do without even more money, which euro nations led by Germany are increasingly reluctant to offer.
The troika wants the country to detail over 4 billion euros of measures to meet targets for 2011 and 2012 because wage cuts will deepen the recession and cause a shortfall this year, one government official told reporters in Athens.
The troika argues that cutting private-sector holiday allowances is among reforms necessary to boost competitiveness in the country. Those opposed say the cuts would deepen the country’s recession, now in its fifth year.
Euro Fell
The euro fell against the yen last week, dropping from a one-month high, as the unresolved Greek situation added to concern. The yield on Germany’s benchmark 10-year bond rose 8 basis points to 1.93 percent, while the yield on Greek 10-year bonds fell 18 basis points to 34.19 percent.
The ECB is considering using its bond holdings to bolster Greece’s next rescue program and support efforts to contain the sovereign debt crisis, three euro-region officials said. The ECB has purchased 219 billion euros of debt-strapped nations’ bonds since 2010 and between 36 billion euros and 55 billion euros are invested in Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.
Papademos met yesterday with the lead negotiators on the debt accord with Greece, Charles Dallara, managing director of the International Institute of Finance, and Jean Lemierre, a senior adviser to the chairman of BNP Paribas SA. The debt swap, Venizelos said on Feb. 4 “is now the easiest part of the process.”
Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet.
To contact the reporters on this story: Natalie Weeks in Athens at nweeks2@bloomberg.net; Maria Petrakis in Athens at mpetrakis@bloomberg.net; Marcus Bensasson in Athens at mbensasson@bloomberg.net
To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Stephen Foxwell at sfoxwell@bloomberg.net
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