Bloomberg News

Greek Bailout Hangs on Razor’s Edge as Reforms, Cuts Sought

February 14, 2012

(Updates with meeting starting in fifth paragraph. See EXT4 for more on the euro-area financial crisis.)

Feb. 5 (Bloomberg) -- Greece’s efforts to win a second bailout from international creditors teetered in the balance as negotiations in Athens failed to clinch an agreement.

“The distance between success and failure, which could come from misfortune or misunderstanding, is very small,” Greek Finance Minister Evangelos Venizelos told reporters in Athens yesterday after consultations with euro area finance ministers. “We are on razor’s edge.”

While agreement had been found on issues such as bank recapitalization and state asset sales, the government and the so-called troika of international creditors are still at odds over labor reforms and fiscal measures for this year. The talks with euro-area finance ministers were “very difficult,” Venizelos said yesterday.

With the country’s stability at stake, the government is racing to clinch agreement on a plan that’s been in the works since July, with talks between international monitors and Greek officials running in parallel with discussions among caretaker Prime Minister Lucas Papademos’s coalition members and Greece’s government and its private creditors.

Venizelos and Papademos convened with leaders of the three political parties backing Papademos after “intensive” meetings with representatives of international creditors earlier in Athens today.

Bond Payment

Open questions involve how much more aid Greece needs, how much more austerity is required, and how to involve the European Central Bank in the debt swap. Facing a 14.5 billion-euro ($19.1 billion) bond payment on March 20 and general elections as soon as April, Papademos must heed calls for tighter austerity to complete the talks on a second aid package in time.

Venizelos said everything needed to be completed by tonight in advance of a meeting of euro-area ministers scheduled for Feb. 8. A formal offer for the debt swap must be made by Feb. 13 to allow all procedures to be completed before the March 20 bond comes due.

The discussions have led to tussles among European central bankers and political leaders. The rescue blueprint includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and loans that will probably exceed the 130 billion euros now on the table.

‘Pandora’s Box’

Deutsche Bank AG Chief Executive Officer Josef Ackermann said a collapse of Greece’s economy would open a “Pandora’s box” that would kill a euro-area recovery.

“We are in a make-or-break situation and Greece plays a very important role -- and if we find a solution in the next few days, I think we’re on the right track,” Ackermann told a panel yesterday in Munich. Ackermann was due fly to Athens last night as talks go on over the swap involving Greek debt with a face value of about 200 billion euros.

The ECB is considering using its bond holdings to bolster Greece’s next rescue program and support efforts to contain the sovereign debt crisis, three euro-region officials said. The ECB has purchased 219 billion euros of debt-strapped nations’ bonds since 2010 and between 36 billion euros and 55 billion euros are invested in Greek sovereign debt, according to estimates by Barclays Capital and UBS AG.

Greek Yields

The euro fell against the yen last week, dropping from a one-month high, as the unresolved Greek situation added to concern the region’s fiscal crisis is far from over. The yield on Germany’s benchmark 10-year bond rose 8 basis points to 1.93 percent, while the yield on Greek 10-year bonds fell 18 basis points to 34.19 percent.

Papademos held meetings over the weekend with members of the so-called troika -- the European Commission, the ECB and the International Monetary Fund -- over what the country has to do to receive more funds. A government official said after yesterday’s meeting the creditors were insisting on cuts to wages and bonuses.

The troika wants the country to detail over 4 billion euros of measures to meet targets for 2011 and 2012 because wage cuts will deepen the recession and cause a shortfall this year, the official told reporters in Athens. Another official said the talks were difficult though not at an impasse.

With Papademos’s term set to end when general elections are held, most likely in April, EU and IMF officials seek guarantees from political leaders in Greece that they will stick to pledges made to receive the financing.

Minimum Wage

Underlining the complexity of the task for Papademos, representatives of Greek employers and the biggest private sector union on Feb. 3 called on him to resist pressure to cut the minimum wage and holiday allowances.

The troika argues that cutting private-sector holiday allowances is among reforms necessary to boost competitiveness in the country. Those opposed say the cuts would deepen the country’s recession, now in its fifth year.

The troika demanded the minimum wage be cut to less than 600 euros a month and that at least one holiday allowance be abolished, Mega TV said, citing unidentified ministers who met with Venizelos yesterday. Supplementary pensions should be cut by 35 percent, the Athens-based channel said.

Greece must carefully examine the terms being demanded by international creditors before agreeing to them, said George Karatzaferis, leader of the Laos party, one of the three supporting Papademos.

Budget Targets

“I will examine every detail and footnote,” Karatzaferis said in Thessaloniki yesterday, according to an e-mailed transcript of his speech. “If we don’t agree with something and the troika insists, we won’t take the package.”

Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid and hastening a German push to make bondholders contribute. The country’s economy shrank 6 percent last year, according to the latest IMF estimates, the budget deficit is still close to 10 percent of GDP and unemployment is around 18 percent.

“We can’t pay into a bottomless pit,” German Finance Minister Wolfgang Schaeuble said on Feb. 2. “Greece needs a new program, there’s no question about that, but Greece must create the conditions for it.”

More austerity risks triggering a “social explosion,” Hieronymos II, the head of Greece’s Orthodox Church, said in a statement on Feb. 3.

Bitter Pill

“We are being asked to take even larger doses of a medicine that has proven to be deadly and to undertake commitments that do not solve the problem, but only temporarily postpone the foretold death of our economy,” he said.

Papademos’s spokesman, Pantelis Kapsis, denied news reports on Feb. 3 that the leader would resign if leaders of the parties backing his interim government refused to agree to additional conditions for new financing.

Even after a second bailout, Greece may be saddled with too much debt, too little growth and too large a budget hole to do without even more money, which euro nations led by Germany are increasingly reluctant to offer.

The lead negotiators of the creditors’ steering committee working on a debt accord with Greece, Charles Dallara, managing director of the International Institute of Finance, and Jean Lemierre, a senior adviser to the chairman of BNP Paribas SA, returned to Athens this weekend to continue talks.

Deutsche Bank’s Ackerman is the chairman of the group, based in Washington, which has more than 450 financial firms as members and is representing private creditors in the talks.

Those talks are happening in parallel with those with the troika, Venizelos said yesterday “but that’s now the easiest part of the process.”

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet.

--With assistance from Jonathan Stearns in Brussels, Jana Randow and Jeff Black in Frankfurt and Rebecca Christie in Brussels and Jonathan Tirone in Munich. Editors: Kevin Costelloe, Sara Marley.

To contact the reporters on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net; Maria Petrakis in Athens at mpetrakis@bloomberg.net Natalie Weeks in Athens at nweeks2@bloomberg.net

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


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