Tags: Greek | Debt | Hammered | Aid | Talks | Begin

Greek Debt Fears Intensify as Aid Talks Begin

Wednesday, 21 Apr 2010 02:50 PM

 

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Greece started talks to hammer out details of a potential aid deal on Wednesday but impatient investors dumped Greek assets and the package faced heated resistance at home and abroad.

Struggling to convince markets that Greece can slash its budget deficit and avoid default, the socialist government is racing to raise 10 billion euros ($13.39 billion) next month, with markets focusing on an 8.5 billion euro bond that falls due on May 19.

Greece is still pushing to finance its debt through market issuance but investors are increasingly convinced it will have to tap the euro zone and IMF package.

The markets showed its impatience with the uncertainty about how Greece will finance its debt on Wednesday, driving the yield on the 10-year bond to 8.4 percent, the highest since at least 1999, on a flattening yield curve, a signal of growing doubt over Greece's solvency.

The plan also drew fire from workers in Athens and lawmakers in Germany, where voters are deeply opposed to helping repeat chronic offender Greece ahead of an election next month.

Greek Finance Minister George Papaconstantinou started meetings with a mission of mid-level advisers from the European Commission, the European Central bank and the International Monetary Fund.

He said the talks, which are meant to outline a three-year economic policy plan — would last two weeks and a text of the program would be decided by May 15 at the latest.

Economists and Greek media have speculated the government could ask to trigger the aid parachute sooner, perhaps even this weekend when Papaconstantinou attends the IMF's annual meeting in Washington.

"The mechanism will be activated and operate, if Greece asks for it, based on the joint text ... this is the process we have chosen," Papaconstantinou told a news conference.

Asked if Greece could seek aid before that, he said: "Theoretically, Greece could do it even tomorrow."

In Germany, where Angela Merkel's government risks losing its majority in a May 9 vote, Finance Minister Wolfgang Schaeuble said the government expected Athens to make a formal request for the aid, a source told Reuters.

"We have to expect it," a member of parliament who attended a meeting of the house finance committee quoted him as saying.

But a rift appeared in the euro zone leaders' plans for quickly delivering Greece aid, when Germany's opposition Social Democrats said they opposed "fast-track" approval for the deal in parliament.

French Finance Minister Christine Lagard said France could mobilize 3.9 billion euros this fiscal year, part of the 6.3 billion euros Paris has pledged to contribute to the 30 billion slated from euro zone states.

"The aid will take the framework of bilateral loans," Lagarde told reporters. She added that the French aid for Greece would have a 5 percent interest charge at three-year maturity.

German Economy Minister Rainer Bruederle said the IMF part of the package could amount to 12 billion euros ($16.13 billion). Greece has yet to ask for the aid which, if activated, would be the largest such bailout ever attempted.

The prospect of outside help has raised anxiety among Greeks already hit by public sector wage cuts, a pension freeze and tax hikes that the government imposed last month to cut this year's budget deficit by one third to 8.7 percent of gross domestic product.

Hundreds of dockworkers blocked passenger vessels at Greece's largest port, Piraeus, on Wednesday to protest the austerity measures. About half a million Greek civil servants are planning another 24-hour strike on Thursday.

"Our strike was a necessity due to the government's fierce attack on our pensions, our employment rights and our income," said George Perros, a leading member of union PAME.

"We want measures that will protect the unemployed. We will step up protests."

Opinion polls show nearly three-quarters of Greeks believe the aid deal, if tapped, would lead to a further deterioration of their living standards. However, most Greeks still support the socialist government elected in October.

A euro zone source said the currency bloc's finance ministers would check at a meeting on May 17 if all members were ready to provide funds to Greece.

But market doubts persist over how long the deal could take to win parliamentary approval in some euro zone states and if it could be hampered by the German election, where voters oppose helping a country that has flouted EU budget rules for years.

A key question is whether Greece can complete the administrative measures necessary to tap the aid and receive the cash before it has to pay back the 8.5 billion euro bond on May 19.

"They're really playing it close. What they need is the money a few days before the bond comes due" on May 19, said Christian Keller, a strategist at Barclay's Capital. "But it would be doable if the Greeks were to ask for it next week."

Germany's Schaeuble said Greece hoped to get through the crisis without applying for aid, but added that default cannot be allowed to happen.

The International Monetary Fund also warned about the broader risk from continued market turmoil over Greece.

"In the near term, the main risk is that, if unchecked, market concerns about sovereign liquidity and solvency in Greece could turn into a full-blown sovereign debt crisis, leading to some contagion," the IMF said in its World Economic Outlook issued on Wednesday.

The worries have shaken the euro currency and pummeled Greek assets, with the premium that investors demand to buy Greek bonds over German benchmarks hitting 524 basis points on Tuesday, the highest since 1998 and around 10 times higher than pre-crisis levels. Greek banking stocks also took a hit, falling 2.9 percent from Tuesday.

Investors also wonder whether Athens will be able to tackle the 177 billion euros in debt coming due over the next 5 years, and many say the strains of high debt maintenance costs and a shrinking economy may force Greece to default or restructure its debt further down the road.

Papaconstantinou rejected the idea on Wednesday, saying: "Rumors about restructuring of debt are nonsense."

Other countries in the euro zone's periphery have also been hit by the Greek crisis. On Wednesday, Portugal sold 1.075 billion euros in short-term treasury bills, but had to pay a higher price than in previous tenders.

The yield spread for 10-year Portuguese bonds over German Bunds widened to 162 basis points on Tuesday from 155 bps at Tuesday's settlement and five year credit default swaps rose to 219 basis points from 200.6 points on Tuesday, near the 244.7 points record high seen in February. (One basis point is equivalent to 0.01%, or one-hundredth of a percentage point.)

© 2014 Thomson/Reuters. All rights reserved.

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