(Updates with analyst comment in third paragraph, spending cuts proposed in seventh. For more debt-crisis news, see EXT4.)
Feb. 15 (Bloomberg) -- European officials ratcheted up the pressure on the Greek government to deliver spending cuts in exchange for a second bailout as they insisted that default is not an option.
Finance ministers canceled a Brussels meeting slated for today and will hold a teleconference instead to prod Greece to do more to clinch an aid package worth 130 billion euros ($171 billion) along with about 100 billion euros of debt relief from private bondholders. Greece needs the money to make a 14.5 billion-euro bond payment on March 20.
The decision to cancel the meeting is “very worrying,” and “reflects a growing concern amongst some euro-area countries that Greece will not abide by the conditions of the second bailout package,” said Nicola Mai, an economist at JPMorgan Chase Bank in London. “It appears that some euro-area countries are willing to let Greece default.”
Two years after pledging to pull Greece back from the brink, European leaders are torn between pouring more aid into the struggling economy or risking an unprecedented national bankruptcy that might force the country out of the euro and prompt renewed market tumult.
“The decision was the result of an evaluation by the head of the eurogroup, Jean-Claude Juncker, that there weren’t sufficient elements of consensus to be sure that a meeting would be successful,” Italian Prime Minister Mario Monti said late yesterday on Sky Italy Television.
After Juncker cancelled the gathering, citing the lack of political assurances from Greek leaders to stick to austerity pledges, a government official in Athens said the leaders of Greece’s two biggest political parties, New Democracy’s Antonis Samaras and Pasok’s George Papandreou, will today provide the written commitments demanded.
Greek Prime Minister Lucas Papademos’s Cabinet agreed to make up a 325 million-euro gap in unaccounted for austerity measures from cuts to defense, public investment and local authorities, two government officials said yesterday. Cuts will also be made to the health budget, one said. The measures still need to be approved by European governments and the International Monetary Fund, the officials said.
The euro erased a loss of as much as 0.8 percent on the news of the Greek politicians’ pending promises. The currency traded up 0.2 percent at $1.3133 at 9:23 a.m. in Berlin.
Meantime, evidence mounted that the euro’s guardians have made progress ring-fencing Greece’s woes. Italy yesterday sold 6 billion euros of bonds at lower borrowing costs as investors shrugged off a downgrade of its credit rating by Moody’s Investors Service.
Speaking on ZDF television, German Finance Minister Wolfgang Schaeuble said Feb. 13 that if efforts to prop up Greece come to naught, “we’re better prepared than two years ago.”
Finance Minister Jan Kees de Jager of the Netherlands, one of four AAA rated states left in the euro area, pushed back against suggestions from Athens that the aid bill will be 15 billion euros higher than planned.
“We agreed upon 130 billion,” De Jager told Dutch RTL television yesterday. “If now it seems more is needed, we should explore other ways.”
Greece has depleted its credibility by missing targets for deficit reduction, economic reforms and asset sales that were set when it obtained a 110 billion-euro aid package in May 2010.
As a result, the once-taboo notion of a departure or expulsion from the euro zone has crept into the mainstream political debate.
“If they don’t do this, they exclude themselves from the euro zone and the impact on the other countries now would be less important than maybe a year ago,” Luxembourg Finance Minister Luc Frieden said at the Atlantic Council in Washington this week.
Also unclear was whether the European Central Bank, buyer of 219.5 billion euros of weaker countries’ bonds in the past two years, would contribute to debt relief in the new package.
Euro statutes bar the central bank from financing governments. One workaround would be for the ECB to funnel profits from its Greek holdings back through its national branches to euro governments.
“These bonds were acquired at an average price that is below face value,” ECB Executive Board member Benoit Coeure told Liberation newspaper in an interview published yesterday. “If there is a profit, as with all monetary holdings, it should be distributed to the states. They can use it to contribute to sustainability of Greece’s debt.”
The central bank probably spent about 47 billion euros to buy Greek bonds with a face value of 60 billion euros, yielding potential profits of 13 billion euros, according to Juergen Michels, chief European economist at Citigroup in London.
“What we agreed upon in the eurosystem is that we don’t wish to make a profit on Greece,” ECB Governing Council member Luc Coene said on Feb. 13 in remarks that were embargoed until today. “So when we distribute profit from a given year to the Belgian state, we will provide a breakdown of what’s due to Greece and it’s then up to the government to decide how to use it,” said Coene, who also is head of Belgium’s central bank.
Representatives of Greece’s private creditors had planned to travel to Brussels in expectation of progress on the “voluntary” debt-relief accord that was another condition for the official aid.
“Policy makers are still scrambling, and markets have gotten used to it, but there is still a general feeling that the Greece situation will not have a happy ending regardless of what they agree to,” said Jay Mueller , who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.
--With assistance from Antonis Galanopoulos in Athens, Rebecca Christie, John Martens and Jones Hayden in Brussels, Mark Deen and James Hertling in Paris, Jurjen van de Pol in Amsterdam, Rainer Buergin and Patrick Donahue in Berlin and Cordell Eddings in New York. Editors: James Hertling, Alan Crawford
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