EU vows to avert Greek default if austerity plan passes

Bloomberg News  Jun 24, 2011 – 8:10 AM ET | Last Updated: Jun 24, 2011 8:12 AM ET

European Union leaders vowed to stave off a Greek default as long as Prime Minister George Papandreou pushes through a package of budget cuts next week, pledging to do whatever it takes to stabilize the euro economy.

“We have agreed that there will be a new program for Greece,” German Chancellor Angela Merkel told reporters before the final session of an EU summit in Brussels today. “This is an important decision that says once again we will do everything to stabilize the euro overall.”

Greece’s next hurdle is to shepherd 78 billion euros ($111 billion) of austerity measures through parliament, after Thursday’s endorsement of the program by experts from the European Commission, the European Central Bank and the International Monetary Fund.

Europe’s latest attempt to stem the debt crisis came after bonds of debt-strapped euro nations slumped and officials in the U.S. and China warned that the euro area’s failure to restore confidence threatened the world economy.

Greece’s Papandreou called the commitment to a new three-year aid program “not only a green light but also a positive sign for the future of Greece.”

Draft Statement

Thursday’s discussions were dominated by Greece, which is drawing on 110 billion euros of loans pledged last year. The leaders paired their show of solidarity with pressure on the Greek opposition party to fall in line with the savings program.

Opposition leader Antonis Samaras refused to commit in meetings with fellow European conservatives in Brussels. While backing budget cuts, he lashed out at the “current policy mix” for too much reliance on tax increases.

The euro erased its decline against the dollar, on course for a third weekly drop, the longest run since February. It was little changed at $1.4232 as of 12:16 p.m. Brussels time. The yield on the 10-year Greek bond declined by five basis points to 16.82%.

‘Worrisome Days’

Papandreou offered an assurance that he would deliver the budget cuts demanded in exchange for the 12 billion-euro installment of emergency loans due in July and a new rescue package, a Greek government official said.

Speaking of “difficult and worrisome days,” EU President Herman Van Rompuy said Greek belt-tightening is “absolutely necessary to restore confidence and over time foster economic growth.”

Already at a European record of 142.8% of gross domestic product, Greek debt is set to rise to 166.1% next year, the EU predicts. The effort to cut a budget deficit that is about 10% of GDP has helped deepen a third year of recession.

In Athens, Finance Minister Evangelos Venizelos, in office since a June 17 cabinet revamp, Thursday announced measures including a 5% tax on lawmakers’ incomes, a levy on self- employed professionals and a reduction in the tax-free income allowance. Greek lawmakers will vote on the package on June 30, in time for a July 3 meeting of European finance ministers to agree to pay the next installment.

Coupon Payments

Greece needs to cover about 4 billion euros of bills maturing between July 15 and July 22 and faces about 3 billion euros of coupon payments in the month, according to Bloomberg calculations. A bigger test comes on Aug. 20 when it must redeem 6.6 billion euros of bonds.

Papandreou said a European commitment to aid Greece will make it easier for him to sell the Greek people on austerity measures that have provoked strikes and riots.

“If there is a strong commitment from the European Union there will be a strong commitment from Greece,” Papandreou said.

The EU sweetened the offer by pledging to increase its contribution to Greek infrastructure projects and provide more “technical assistance” to enable the Greek government and companies to tap European subsidies.

Europe will “look at how we can use existing European structural funds in Greece so that they have an immediate impact on growth and jobs,” European Commission President Jose Barroso said.

‘Informal and Voluntary’

Leaders of the euro area’s six AAA rated countries have said the key ingredient of a second package must be a pledge by banks, insurance companies and asset managers to maintain their holdings of Greek bonds.

An EU statement spoke of the need for “informal and voluntary rollovers of existing Greek debt at maturity,” avoiding a coercive exchange that would lead credit-rating companies to declare Greece in default.

To make the rollover voluntary, talks with Greek bondholders must be held on a country-by-country basis, not organized from Brussels, an EU official told reporters yesterday. The EU wants national central banks and finance ministries to speak to financial institutions in their countries, the official said.

“We don’t see any way that investors are going to come out being paid on time and in full,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Penn.

Bloomberg.com

Greece in deal with EU-IMF on austerity plan

Greece won the consent of international lenders on Thursday for a five-year austerity plan intended to avoid looming bankruptcy and its prime minister pledged to push radical economic reforms through parliament.

After a day of wrangling in Athens, new Finance Minister Evangelos Venizelos clinched a deal with EU and IMF inspectors on extra tax rises and spending cuts to plug a 3.8-billion euro funding gap due to a revenue shortfall.

Greek government spokesman Elias Mossialos, accompanying Prime Minister George Papandreou at an EU summit in Brussels, confirmed the talks had been completed and the legislation would be put to parliament next week.

The euro rebounded against the dollar and U.S. stocks pared losses on news of the agreement.

“It helps that Greece is sticking to its austerity plan,” said Perry Piazza, director of investment strategies with Contango Capital Advisors in San Francisco. “In general this is good news and it will help.”

European Union leaders insisted that the Greek parliament must enact deep spending cuts, more tax hikes and a major sell-off of state assets to secure desperately needed aid and avoid a potential default in mid-July.

In a draft statement, the leaders said that approval of the austerity package would pave the way for disbursement of a desperately needed 12 billion euros in aid in early July and provide the basis for a second rescue package backed by the EU and the International Monetary Fund.

Papandreou said on arriving at a summit: “Greece is committed, strongly committed, to continue a very important program for major changes, radical changes, to make our economy viable.

The EU leaders also exhorted conservative Greek opposition leader Antonis Samaras to rally behind the austerity program, but he maintained his refusal to vote for the plan.

“Given the length, magnitude and nature of required reforms in Greece, national unity is a prerequisite for success,” the draft summit statement said.

Euro zone governments are meanwhile talking to banks and insurance companies to try to convince them voluntarily to maintain their exposure to Greek debt when their bonds mature, as part of a possible second rescue for Athens.

EU leaders stressed they stood ready to provide more money to keep Greece afloat for the next three years if it could deliver on reforms after falling behind on its deficit reduction targets.

“All conditions must be met,” Luxembourg Prime Minister Jean-Claude Juncker told reporters. “If Greece does what it has to do, we will do what we have to do. This is not a threat. It’s just a confirmation that we’re continuing our efforts.”

German Chancellor Angela Merkel, who has taken perhaps the toughest line on Greece, urged the Greek opposition to do what was necessary and get behind the package. “In such a situation, everyone must stand together in a country,” she said.

PAPANDREOU’S PRIVATE DOUBTS

While Papandreou has expressed confidence over the June 28 vote in public, Slovak Prime Minister Iveta Radicova said he had voiced uncertainty in a private telephone call on Wednesday.

“Papandreou has serious doubts about whether the necessary steps will pass in parliament,” Radicova told the Slovak parliament’s European affairs committee.

The Greek crisis dominated debate at the summit, the fourth the EU’s 27 leaders have held this year as they grope for a solution to debt woes that have forced Greece, Portugal and Ireland to seek bailouts and roiled global financial markets.

Investors remain skeptical. Five-year credit default swaps on Greek government debt rose 138 basis points to 2,025 bps, according to data monitor Markit, implying a more than 80 percent probability of default over that period.

A Greek default would force European banks and governments to take big losses, spread contagion to other stressed euro zone sovereigns and potentially plunge the economy of the world’s biggest trading bloc, already slowing, into recession.

GETTING BANKS ON BOARD

Even if Greece persuades the EU and IMF that it is fully committed to making the budget adjustments demanded, it will only buy the government a few months’ respite and most economists expect Athens will have to default eventually.

Greece accepted a package of 110 billion euros of EU/IMF loans in May 2010 and now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

Euro zone member states, led by Germany, insist any second aid package must involve the private sector. But credit rating agencies have said they would treat even a voluntary debt rollover as a selective default, a decision that could spread turmoil through markets.

“We are working on a solution which is based on a voluntary rollover and I expect it will not create a credit event,” Rehn said, explaining that part of the aim was to keep discussions at national level to avoid any suspicion of Europe-wide coercion.

At meetings on Wednesday, banks and insurers in Germany, France, Spain and Belgium were asked by national financial authorities to roll over their holdings of Greek debt voluntarily when the bonds mature.

A financial source said Franco-Belgian banking group Dexia is prepared to roll over its exposure to Greek debt, the biggest among Belgian banks, adding to the list of banks prepared in principle to take part.

© Thomson Reuters 2011