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Papademos Readies Greek Budget, Debt Swap After Vote Win

November 17, 2011

(Updates with Cabinet to meet in second paragraph, IIF in sixth paragraph. See EXT4 for debt crisis news.)

Nov. 17 (Bloomberg) -- Greek Prime Minister Lucas Papademos turned his attention to finalizing next year’s budget and a voluntary debt swap, two conditions the country must meet to resume receiving international loans and avert a collapse of the economy, a day after winning a confidence motion.

Finance Minister Evangelos Venizelos will present the 2012 spending plan to the Cabinet tomorrow before it’s submitted to parliament later in the day. The interim government, backed by three of the five Greek parliamentary parties, also started talks with bondholders on a voluntary debt swap that is part of the country’s second bailout agreement.

Papademos’s immediate priority is to secure the release of an 8 billion-euro ($10.8 billion) loan under an earlier bailout by the middle of next month. Disbursement was halted by German Chancellor Angela Merkel and French President Nicolas Sarkozy after former Prime Minister George Papandreou said he planned a referendum on the terms of the second bailout, roiling markets.

“Disbursement of the tranche will depend on whether the two main political parties will be able to deliver the additional fiscal measures,” Fabio Fois and Antonio Garca Pascual of Barclays Capital wrote in a note to investors. The release of the 8 billion-euro tranche will provide “sufficient funds” until March 2012, allowing the debt swap and detailed talks between the government and lenders to be completed.

Three-Month Mandate

Papademos, a former European Central Bank vice president, has won a three-month mandate to implement budget measures and ensure a bailout of 130 billion euros agreed to with Greece’s euro partners on Oct. 26. That will also mean arranging a debt swap that aims to slice 100 billion euros off the country’s debt burden of 355 billion euros.

Charles Dallara, the head of the Institute of International Finance, which represents more than 450 financial companies, told reporters at a briefing in Frankfurt today he believes it is possible to reach “a very, very high” participation in the swap with the IIF seeing one or two possible solutions.

The IIF will “concentrate on a more limited number of options,” as the circumstances have changed, said Jean Lemierre, a senior adviser to BNP Paribas SA who is helping coordinate a deal between investors and European leaders.

Greece regards two proposals put forward by Dallara at his meetings yesterday with Venizelos and Papademos as unacceptable because they don’t meet EU requirements to reduce the country’s debt to 120 percent of GDP by 2020, Kathimerini newspaper reported earlier, without saying how it got the information.

‘Fragile Project’

“Even assuming that the deal goes through, it remains uncertain that a 50% haircut will be sufficient to put Greece back on a sustainable debt track,” Thomas Costerg, an economist at Standard Chartered Bank in London, said in an e-mail. “The Greek debt swap has always been a fragile project, owing to its voluntary nature.”

Greece plans to pay lenders 50 cents for each euro the government borrowed under the terms of the bailout plan agreed to at the Oct. 26 summit. Its 4 percent notes due in August 2013 now trade at 34.5 cents. Fitch Ratings says the agreement with creditors would amount to a “default event” if implemented, while the International Swaps and Derivatives Association says it won’t trigger credit-default swaps.

Market Reaction

The euro was little changed at $1.3468 at 7:38 p.m. Athens time. European stocks declined, with the benchmark Stoxx Europe 600 Index losing 1.3 percent to 233.97 at the close in London.

Greece’s benchmark stock index gained 1 percent to 724.81. The yield on the 10-year Greek bond added 27 basis points to 28.92 percent. Two-year note yields fell 226 basis points to 111.2 percent after adding 303 basis points yesterday.

Greece’s debt will reach 163 percent of gross domestic product this year and jump to 198 percent in 2012, the European Commission said in its economic forecast. The estimate doesn’t include the effects of the debt swap. That compares with 173 percent predicted by the government in its 2012 draft budget.

About 27,000 demonstrators marched through Athens today the anniversary of the 1973 student uprising against a military dictatorship ruling Greece at the time.

Police deployed more than 5,000 personnel to guard the march, according to a spokeswoman yesterday. Sixty people were detained.

Pension, Wage Cuts

The new government needs to push ahead with plans to cut 30,000 state workers and reduce pensions and wages to meet conditions for the loans. Unions have said they plan a general strike when the 2012 budget is voted in parliament.

Greece’s budget deficit in the first 10 months of the year widened 11 percent to 20.1 billion euros from 18.1 billion euros a year earlier, according to preliminary figures released yesterday. The figure is in line with a target of 20.4 billion euros.

A total of 255 lawmakers in the 300-strong Greek Parliament supported the confidence motion and 38 voted against Papademos’s government in a confidence motion on Nov. 16.

Papademos formed a government on Nov. 11 after four days of political arguing that followed global turmoil sparked by Papandreou’s referendum plans, which were dropped, and as EU and IMF officials increased their calls for cross-party support for economic reforms that may last a decade.

Broad Political Support

Antonis Samaras, Greece’s main opposition leader, has balked at signing a separate letter pledging commitment to austerity measures requested by EU officials, saying his support for the transitional government is enough.

The IMF will release the next tranche of funding for Greece once there is broad political support for the measures attached to the loan, a spokesman said. “It’s important that the unity government now shares its commitment to the implementation of the economic program,” IMF spokesman David Hawley told reporters today.

Most Greeks believe Papademos’s government is the best chance for the country to remain in the euro area, according to a poll by Alco SA for Newsit website. Sixty-six percent of the 1,000 Greeks surveyed between Nov. 14 and Nov. 16 responded positively to the question, compared with 22 percent who responded negatively.

--With assistance from Tom Stoukas and Eleni Chrepa in Athens, Jim Brunsden in Brussels and Aaron Kirchfeld in Frankfurt. Editors: Rodney Jefferson, Eddie Buckle

To contact the reporters on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net; Marcus Bensasson in Athens at mbensasson@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net


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