Bloomberg News

Rehn Urges Greek Cuts to Unlock Payment, Predicts Bond Deal

June 16, 2011

(Adds comment from IMF in 12th paragraph.)

June 16 (Bloomberg) -- Greece needs to overcome its political logjam to escape default and clinch an upgraded aid package partly borne by bondholders, European Union Economic and Monetary Commissioner Olli Rehn said.

As riots broke out in Athens and the Greek government teetered, Rehn said “close contact” with the International Monetary Fund made him confident of an accord at a weekend crisis meeting to pay out 12 billion euros ($17 billion) in July as long as Greece enacts new budget cuts.

“I know it is difficult, but this is the only way of avoiding a default of Greece,” Rehn said in a Bloomberg Television interview in Brussels today. “I trust that all the political leaders and responsible politicians realize their responsibility at this critical juncture.”

Rehn paired the warning to Greece with a message of reassurance to financial markets, saying Europe will do what it takes to prevent the Greek crisis from triggering a euro-area “catastrophe.”

Greek bonds plummeted today, with two-year yields topping 30 percent, as anti-austerity protests and Prime Minister George Papandreou’s impending cabinet realignment stoked concern that Greece won’t deliver the savings required as conditions for further aid.

Bond spreads in Spain, Italy and Belgium also widened, echoing the tensions that accompanied Greece’s first 110 billion-euro rescue package in May 2010 and led the EU to set up a 750 billion-euro safety net for fiscally distressed countries.

‘Certain Misreading’

“There is a certain misreading of the intentions and future actions of the European leaders,” Rehn said. “We will not let the euro area face any kind of catastrophe.”

Rehn also said views are converging over a German-led push to saddle bondholders with some of the costs of Greece’s longer- term rescue. He predicted an agreement next month on a three- year aid package including a “voluntary” rescheduling of Greek debt.

Greece’s immediate concern is to obtain 8.7 billion euros from Europe and 3.3 billion euros from the IMF in July, promised as part of last year’s precedent-setting aid package to stave off the euro area’s first default.

“We have been in very close contact with the IMF,” Rehn said. “I’m confident we can conclude the review in the coming days, by Sunday, and we can thus take the decisions on the disbursement respectively in the two organizations, so this next disbursement can take place in early July.”

‘Buys Time’

“It certainly buys time and I think that’s what’s important,” Sarah Hewin, a senior economist at Standard Chartered Bank in London, said on Bloomberg Radio. “For the near term, it’s that 12 billion that counts.”

The IMF said it stands ready to continue supporting Greece if the economic measures agreed upon are adopted.

“Progress is being made in the discussions to ensure the full financing of the program, and we anticipate a positive outcome on this at the next eurogroup meeting,” Caroline Atkinson, a spokeswoman for the Washington-based IMF, said in an e-mailed statement today.

The disbursement, the fifth since Greece won relief last year, hinges on the Greek parliament agreeing to more belt- tightening measures to whittle away at debt equivalent to 142.8 percent of gross domestic product, the highest in the euro’s 12- year lifespan.

Papandreou’s proposal for 78 billion euros in budget cuts and state-asset sales prompted defections from allies and failed to win opposition backing, leading him to seek fresh faces for his government.

Confidence Vote

Papandreou plans to announce the new lineup today, then hold a weekend confidence vote at what Rehn called a “very serious moment” in the crisis that has tested Europe’s economic management to the breaking point.

“We will be able to avoid any default scenario,” Rehn said.

European finance ministers meet on June 19 after an emergency session on June 14 broke up without an accord on the next loan disbursement or on how to rope in bondholders without prompting credit-rating companies to declare a Greek default.

Germany wants to extend Greek bond maturities, a move that the European Central Bank says would constitute a default and send shockwaves through the financial system.

Germany’s Stance

Without giving details or betraying Germany’s stance, Rehn said that “we are seeing a convergence on this issue, which is a positive sign.” Details will be settled at a July 11 meeting of finance ministers, he said.

“We will have to iron out the remaining differences as regards the nature of private-sector involvement,” Rehn said.

The euro slid to three-week lows against the dollar and yen, and stocks fell in Europe and Asia.

“We have always been concerned of contagion,” Rehn said. “One of the achievements over the past one-and-a-half years has been that we have been able to prevent a financial meltdown in Europe. We have been able to avoid a Lehman Brothers kind of catastrophe on the European soil.”

--With assistance from John Tucker in New York. Editors: Jones Hayden, Patrick G. Henry

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net.

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


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