Bloomberg News

Greek Rescue May Be Delayed by Divisions on Investors’ Role

June 15, 2011

(Updates with Greek bond yield in eighth paragraph.)

June 15 (Bloomberg) -- Euro-area finance chiefs struggling to break a deadlock on how to enroll investors in a second Greek rescue without triggering a default said they may need more time to reach a deal.

An emergency session of finance ministers in Brussels late yesterday failed to reconcile a German-led push for bondholders to shoulder part of the cost of a new Greek aid package with European Central Bank warnings backed by France that the move might constitute the euro area’s first sovereign default.

With consensus elusive before the target date of a leaders’ summit late next week, finance ministers agreed to convene again on June 19, a day earlier than planned. Talks may drag on into July, Luxembourg’s Finance Minister Luc Frieden said.

“There’s no plan B, we have to come up with a solution,” said Gilles Moec, co-chief European economist at Deutsche Bank AG. “They’ll find a way to make it safe, which is what the ECB and French want, and make it irrevocable and grant more time, which is what Germany wants.”

The focus now shifts to German Chancellor Angela Merkel and French President Nicolas Sarkozy to resolve their differences at a June 17 meeting in Berlin. Pressure on euro-area governments to craft a rescue plan intensified this week after Standard & Poor’s slapped Greece with the world’s lowest credit rating.

“We have to proceed very cautiously,” Frieden told reporters after yesterday’s emergency session, adding that “very clearly we have to go in the direction” of a delay until next month. “Several options -- from the IMF, as well as from the European Central Bank and from the European Commission -- still have to be studied.”

Greek Yields Record

Yields on 10-year Greek bonds touched 17.46 percent yesterday, a record in the 17-nation euro area’s history. The slump pushed the extra yield that investors demand to hold Greek 10-year bonds instead of similar maturity German bunds to a record.

The benchmark 10-year yield rose two basis points to 17.40 percent today at 7:40 a.m. in London. The difference in yield that investors demand to hold Greece’s 10-year bonds instead of German bunds was at 1,438 basis points.

Thirteen months after Greece was granted a 110 billion-euro ($159 billion) bailout that failed to halt the spread of the debt crisis to Ireland and Portugal, politicians are at odds over fulfilling a pledge to make creditors pick up some of the cost of a second rescue.

ECB policy makers have warned against German proposals that maturities on Greek debt be extended for seven years, an outcome rating companies have said would be considered a default. ECB President Jean-Claude Trichet, who attended yesterday’s meeting, said on June 9 that governments were flirting with what could be a “enormous mistake.”

‘All Options’

Finance ministers including Elena Salgado of Spain and Didier Reynders of Belgium stressed that any decision must satisfy the ECB’s concerns. Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said before the meeting that “all options” would be considered.

Germany and France, Europe’s two biggest economies, are on opposite sides of the dispute, with France indicating backing for the ECB’s view. While French Finance Minister Christine Lagarde has ruled out any action that constitutes a “credit event,” her German counterpart, Finance Minister Wolfgang Schaeuble, said June 10 that Europe’s biggest economy “has to insist on the participation of the private sector” in Greece.

Schaeuble said yesterday’s meeting produced “no result.”

Greece’s ports, banks, hospitals and state-run companies will grind to a halt today as the two biggest labor unions call the third general strike of the year to oppose Prime Minister George Papandreou’s budget cuts and asset sales. About 1,000 protesters were demonstrating in front of the Parliament today.

Preliminary data released by the Finance Ministry in Athens yesterday showed the central-government budget deficit widened in the first five months of the year to 10.3 billion euros.

“The obvious implication is they will reach agreement as the alternative is a disaster,” said David Mackie, London-based chief European economist at JP Morgan Chase & Co. A compromise will be made to “get us through a few weeks or months, but if Greece keeps under-delivering then at some stage we’ll be back in the same position.”

--With assistance from Stephanie Bodoni, Lorenzo Totaro, Gregory Viscusi, Jonathan Stearns and Rebecca Christie in Brussels, and Simon Kennedy in London. Editors: Patrick G. Henry, Jones Hayden

To contact the reporters on this story: Alan Crawford in Brussels via acrawford6@bloomberg.net; Rainer Buergin in Brussels at rbuergin1@bloomberg.net.

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


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