Bloomberg News

Greece to Get Next Aid Payment as EU Readies Second Bailout

June 03, 2011

(Updates with new aid in fifth-eighth paragraphs.)

June 3 (Bloomberg) -- European Union and International Monetary Fund officials agreed to pay the next installment to Greece under last year’s 110 billion-euro ($161 billion) bailout, paving the way for an upgraded aid package that includes a “voluntary” role for investors.

“I expect the eurogroup to agree to additional financing to be provided to Greece under strict conditionality,” Luxembourg Prime Minister Jean-Claude Juncker said after meeting with Greek Prime Minister George Papandreou in Luxembourg today. “This conditionality will include private sector involvement on a voluntary basis.”

Papandreou, confronting opposition home and the demands of international lenders, will establish an agency to manage an accelerated asset-sale schedule and make “significant” cuts in public-sector employment, according to a statement released today in Athens.

The agreements capped a week when Greece’s fiscal crisis worsened enough for Moody’s Investors Service to raise the probability of a default to 50 percent. Bonds gained today on the prospect of a new aid plan, with the yield on the country’s two-year notes falling 146 basis points to 23.1 percent.

With the review complete, EU leaders will now focus on wrapping up a new bailout package to prevent the euro area’s first sovereign default. A year after the rescue that aimed to stop the spread of the debt crisis, Greece remains mired in recession, shut out of financial markets and saddled with the biggest debt load in the euro’s history.

Shut Out

Under the original rescue, Greece was due to sell 27 billion euros of bonds next year. EU leaders and Papandreou have acknowledged that a return to markets won’t be possible with Greece’s 10-year debt yielding 16 percent, more than twice the level at the time of the bailout. The EU is looking to close that funding gap through new loans and bondholders’ willingness to roll over Greek debt, EU officials have said.

Europe’s financial leaders needed to hammer out a revised Greek package to persuade the IMF to pay its share of the 12 billion-euro tranche originally due in June. The IMF had indicated that it would withhold its 3.3 billion-euro piece unless the EU comes up with a plan to close Greece’s funding gap for 2012. Today’s statement said the full payment would be made in early July.

IMF Funds

The Washington-based lender provided 30 billion euros of Greece’s original loans, along with a third of the loans since granted to Ireland and Portugal as the debt crisis spread.

Policy makers have in recent days narrowed in on bond rollovers as a pillar of any new aid package. The step would be favored by the ECB, according to two officials familiar with the situation, because it would skirt the risk of any agreement being classified as a default. Investors may be given preferred status, higher coupon payments or collateral, said two other EU officials familiar with the situation.

About 55 percent of investors in Greek government bonds would likely roll over holdings of securities maturing through 2013 to help the nation manage its budget deficit, according to ING Groep NV.

Papandreou is promising 6.4 billion euros of spending cuts this year, another 22 billion euros up to 2015, and 50 billion euros in sales of assets including Hellenic Telecommunications Organization SA and Public Power Corp SA. The pledges were key to securing the fifth bailout payment. Papandreou is facing a backlash against the additional measures at home.

Workers Protest

Members of the PAME labor union took over the Finance Ministry offices in central Athens today, preventing employees from entering the building. They hung a banner from the roof calling for a general strike to oppose the measures.

A group of 16 lawmakers from Papandreou’s Pasok party this week sent the premier a letter asking for a discussion of the austerity process. Papandreou will present the plan to lawmakers and his Cabinet next week. Workers at state-owned companies are organizing a 24-hour strike on June 9.

Moody’s downgraded Greece to Caa1, on a par with Cuba, and raised the nation’s risk of default on June 1 after policy makers considered asking investors to reinvest in new Greek debt when existing bonds mature. The move prompted Greek 10-year bonds to fall to the lowest since January.

“The general perception is that Greece will head to some form of restructuring, and eventually the ratings will probably move to D,” said Brian Barry, an analyst at Evolution Securities Ltd. in London. “For a sovereign rating to fall from about A to this level is new territory.”

Banks Cut

Moody’s today cut the ratings on eight Greek banks, including the nation’s largest, National Bank of Greece SA.

The new aid and debt rollovers will give Greece more time to trim its budget deficit, though will do little to reduce its rising debt load.

Greece’s debt is likely to mushroom to 157.7 percent of gross domestic product in 2011, the highest in euro history, the European Commission said May 13. It predicted a 3.5 percent economic contraction, shedding doubts on whether Greece will generate the tax revenue to pay off its debts.

The aid package may be more about buying time for Europe’s banks and other high-debt nations to prepare for the fallout of a Greek restructuring, said James Nixon, chief European economist at Societe Generale SA in London.

“This strategy of playing for time is not without its merits” he said in a note to investors, today. “Firstly it buys a number of the other Europeans time to put their own house in order and pursue their programs of fiscal consolidation. Time hopefully will also help Europe’s banks provision against future losses on sovereign debt. Finally and perhaps most critically, time also enables the peripheral economies themselves to implement fiscal reforms and return to a primary balance.”

Juncker rejected the worst-case scenario.

“It’s obvious that there will be no exit of Greece from the euro area,” he said. “There will be no default and Greece will be able to fully honor its obligations.”

--With assistance from Natalie Weeks Editors: Andrew Davis, James Hertling

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Jonathan Stearns in Luxembourg at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling in Paris at jhertling@bloomberg.net


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