Bloomberg News

Greece Set to Get Aid as Bankers, Lawmakers Fall in Line

July 01, 2011

(Updates with comment from Papandreou in 19th paragraph.)

July 1 (Bloomberg) -- Euro-area finance ministers are set to approve the next aid payment due Greece and outline a second rescue after banks lined up behind debt-rollover plans and Greek lawmakers approved a budget-cutting package on a second ballot.

The endorsements by Greece’s creditors and parliament met European Union conditions for preventing a default. Finance chiefs descend on Brussels in two days before a scheduled session on July 11-12, where they aim to close this chapter of the debt crisis that has raged for more than a year.

The euro rose to a three-week high yesterday and the Euro Stoxx 50 Index rallied for a fourth day as investors bet policy makers would make good on their vow at a summit last week to do what it takes to avoid a Greek default.

“As markets exhale after the two successful Greek votes, it remains to be seen whether conditions begin to return to something approaching normal,” said Marchel Alexandrovich, an economist at Jefferies International in London. It’s too early to say “that the Greek problem has been overcome.”

Europe’s latest attempt to prevent Greece’s fiscal frailty from infecting the entire region -- and the world -- caps a turnaround from just three months ago when the country’s then- Finance Minister George Papaconstantinou predicted a return to markets this year. Since then, Greek yields surged and credit- insurance prices indicated an increasing likelihood of default after the government in Athens reported missing deficit targets.

Debt Burden

Greece is Europe’s most-indebted country with debt at about 150 percent of output. Standard & Poor’s rates it below every other country in the world.

The July 3 finance ministers’ meeting will focus on releasing the fifth tranche of aid from last year’s 110 billion- euro ($160 billion) bailout, Luxembourg’s Jean-Claude Juncker, the group’s chairman, said June 29.

“This is a first good answer from Greece, now they need to implement” the deficit cuts, Belgian Finance Minister Didier Reynders told reporters yesterday in Paris. “I expect we will be able to organize the payment of the next tranche of 12 billion” euros.

A second package may require about 45 billion euros in new loans, 30 billion euros in Greek asset sales and a contribution of about 30 billion euros from creditors, who have indicated a willingness to roll over some of their holdings, people familiar with the matter have said.

Upcoming Report

Further aid can’t be organized before a report being prepared by the International Monetary Fund, the European Commission and the European Central Bank gives an indication of how much progress Greece has made on overhauling its economy, Reynders said.

Finance ministers are also likely to discuss progress the region’s banks and insurers are making toward an agreement on how much Greek debt to roll over in response to politicians’ pressure.

German banks have agreed to roll over the Greek bonds they’re holding that mature through 2014, which amount to about 2 billion euros, Finance Minister Wolfgang Schaeuble said yesterday. The country’s so-called bad banks will provide 1.2 billion euros as well, he said.

Deutsche Bank AG Chief Executive Officer Josef Ackermann, at a conference in Berlin yesterday with Chancellor Angela Merkel, predicted that financial companies would contribute to help avert a “meltdown.” German and French lenders are the biggest foreign holders of Greek debt and their participation would help the EU meet a goal of getting banks to roll over at least 30 billion euros of bonds.

Rollover

Under a French proposal, bondholders would agree to roll over 70 percent of their maturing debt into new 30-year Greek bonds with the principal on the new debt guaranteed through Greece investing in zero-coupon bonds of similar maturity. Under a second option, investors would roll over 90 percent of their debt into new five-year bonds with no guarantee.

Ideally, the rollovers should be done “on a level playing field,” Reynders said. That means the same conditions across “different sectors such as banks and insurance and across different countries.”

Greek Prime Minister George Papandreou won the final vote by 155 to 136 to enact a 78 billion-euro package of tax increases and asset sales. Those steps were endorsed in a vote yesterday that was marred by street violence as police fired tear gas on crowds in Athens.

Protests

Greece’s largest public-sector labor union plans a further rally today in an extension of protests of more than 20,000 people that gripped the city center this week. Parliament has become the focus of repeated riots that underscore the challenge faced by Papandreou in executing his plan in a recession-hit economy while appeasing the EU partners funding its debts.

Papandreou said his government and Pasok party is ready to rise to the challenge of reforming Greece.

“The Pasok party took the decision to change itself and Greece and we accept the responsibility,” Papandreou said in a speech in Athens today televised live on state-run NET. “It’s a political challenge to rise to the occasion.”

Some economists doubt the country’s ability to meet the terms of its economic reform plan.

“This is the end of the road for Greece in terms of austerity,” said George Magnus, a senior economic adviser at UBS AG in London, told Bloomberg Television’s “Last Word.” “We cannot expect the Greek parliament and Greek citizens to go through this all over again every quarter when they’re non- compliant with their targets.” This is “short sightedness” on the part of European leaders, he added.

--With assistance from Maria Petrakis, Natalie Weeks and Marcus Bensasson in Athens, Andrea Catherwood in London Aaron Kirchfeld in Frankfurt and Rainer Buergin and Patrick Donahue in Berlin. Editors: James Hertling, Jeffrey Donovan

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net

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


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