Bloomberg News

Greek Debt Review May Mean More Bailout Talks, Merkel Says

September 28, 2011

(Updates with troika resumption in fourth paragraph, Issing comment in fifth. See EXT4 <GO> for more on the debt crisis.)

Sept. 28 (Bloomberg) -- German Chancellor Angela Merkel signaled policy makers may review Greece’s second bailout after international debt inspectors rule on whether the country is meeting the terms of its current aid package.

Greece’s “numbers in September, as it now seems, were again different from what we expected under the program,” Merkel told Greek broadcaster NET when asked whether the second bailout agreed by European leaders on July 21 will be revised.

“We must now await what the troika, that is the expert mission, finds out and tells us: do we need to renegotiate or don’t we need to renegotiate?” Merkel said, according to a transcript provided by her press office late yesterday. “What we would like the most, of course, is that the numbers stay as we know them. But I can’t pre-empt the outcome of the troika.”

Experts from the European Commission, European Central Bank and International Monetary Fund will return to Athens tomorrow as officials race to put in place a package of measures that will ring-fence Greece. Euro-area finance ministers will hold an extra meeting on Greece in October amid international concerns that a default could plunge the global economy into recession.

Greece won’t be repay all of its debt and will have to leave the euro area, Otmar Issing, the ECB’s former chief economist, was quoted as saying by Stern magazine. The country needs to write down its debt by at least 50 percent, the German weekly quoted him as saying in an interview published today.

‘Sustainable Footing’

The restart of the so-called troika review in Athens will “constitute an important step toward achieving the 2012 agreed fiscal target and putting the Greek public finances on a sustainable footing,” commission spokesman Amadeu Altafaj told reporters in Brussels.

Merkel’s remarks came as a person familiar with the matter said German banks are resisting pressure to accept larger writedowns on their holdings of Greek government debt. German lawmakers have called on lenders in recent days to accept a larger writedown than the 21 percent proposed by the Institute of International Finance, an industry lobby group, said a person briefed on the talks.

Earlier, the Financial Times Deutschland reported that euro members have started talks on renegotiating the second bailout. Banks and insurance companies might have to increase their contribution to the rescue package as Greece’s economy has deteriorated, the German newspaper said, citing unidentified people familiar with the situation.

Property-Tax Vote

Greek Prime Minister George Papandreou won parliamentary backing for a property tax to meet deficit-reduction targets required to avoid default, prompting an offer of support from Merkel in Berlin, where the two had dinner yesterday.

“We want a strong Greece in the euro area and Germany is ready to offer all kinds of help that is needed,” Merkel told reporters at a joint briefing with Papandreou. “I have heard so far that Greece is ready to meet the conditions” set by the IMF, the ECB and the EU commission.

Euro-area governments are withholding approval of the next loan installment under Greece’s May 2010 110 billion-euro ($150 billion) bailout until officials from the three institutions rule whether the government is meeting its targets. The next aid payment is due in October.

Merkel didn’t elaborate in the television interview on possible changes to the second bailout, which includes an accord for banks and insurers to reduce the value of their Greek debt holdings. Merkel’s chief spokesman, Steffen Seibert, didn’t reply to requests for comment by phone and text message today.

Greek Bonds

The yield on 10-year Greek government bonds fell 4 basis points to 23.27 at 12:30 p.m. in Athens today and the two-year note yield climbed 38 basis points to 70.43 percent.

Greek bonds have tumbled in recent weeks and credit insurance has soared, putting the chance of default at more than 90 percent, as Papandreou struggled to rein in the deficit and a recession deepened in its third year.

“Implementation of the measures is the biggest challenge for the government as the trade unions and parts of the civil service will mount significant resistance, raising the risk of inertia and inaction,” Wolfango Piccoli, an analyst in London at Eurasia Group, said before the vote.

The property tax was part of a package of cuts announced earlier this month after officials from the European Union and IMF told Greece it wasn’t meeting the terms of its rescue.

European Commission President Jose Barroso called today for Europe’s permanent rescue fund to be speeded up, saying the debt crisis had reached a “serious” stage.

Due to be set up in mid-2013, the European Stability Mechanism will wield a 500 billion-euro war chest that could be used more flexibly than the current guarantee-based temporary financial backstop.

The European Union also proposed a financial-transaction tax that would take effect in 2014 and raise about 57 billion euros a year. The plan would set minimum tax rates for trading of stocks, bonds and derivatives contracts throughout the 27- nation EU, the commission, the EU’s Brussels-based executive, said today.

--With assistance from James G. Neuger in Brussels. Editors: Alan Crawford, Leon Mangasarian

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net

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


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