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Troika Returns to Athens as Budget Showdown Looms: Euro Credit

September 05, 2012

Greek Prime Minister Antonis Samaras faces a week of wrangling as his coalition government tries to find common ground on two more years of austerity to persuade international lenders to keep the country in the euro.

Inspectors from the European Commission, European Central Bank and International Monetary Fund, known as the troika, are due back in Athens on Sept. 7 to complete a review begun in July. They are likely to find that the three coalition partners are still working on an 11.5 billion-euro ($14.5 billion) blueprint that may test the cohesion of Samaras’s government.

“Implementation is key in Greece, which means the key is whether the government survives to implement the program,” said Athanasios Vamvakidis, head European currency strategist at Bank of America Corp. in London. “Greece just got a new aid package, a large haircut and a new government, and still needs more money. If Greece cannot implement the program now, the troika is likely to conclude that it is pointless funding Greece.”

Ten-year Greek yields are the lowest in three months, as concern about an imminent and disorderly exit from the euro area receded following Samaras’s June election victory and the creation of a pro-euro coalition government. The rate dropped 10 basis points to 21.86 percent at 11:15 a.m. in Athens today, down from 23 percent at the end of August and from an average 27.4 percent during the past year.

Finance Minister Yannis Stournaras met in Berlin with his German counterpart Wolfgang Schaeuble yesterday. “The central point is that Greece implements its obligations completely,” the German ministry said in a statement following the meeting.

Power Play

Stournaras will meet the troika on Sept. 9 in a bid to cement the spending cuts before euro-area finance ministers meet in Nicosia on Sept. 14. Before then, Samaras needs to broker an agreement with the heads of the two smaller parties, Pasok and Democratic Left, which are keeping him in power.

Greece’s lenders held back on loans pledged under two rescue packages totalling 240 billion euros in the wake of two inconclusive elections in May and June, which derailed reforms, halted state-asset sales, and stoked concerns about the nation’s future in the 17-nation euro, spurring Greeks to withdraw their savings from banks.

A decision on a payment of 4.2 billion euros that was due in June as the first tranche of a 31 billion-euro transfer may be made next month, after Parliament votes on the budget, the troika compiles its progress report and Samaras lobbies for more time to assuage the impact of the new measures.

Bank Needs

Most of the instalment outstanding is destined for Greek banks (ASE), under a previously-agreed plan to recapitalise the institutions that suffered the most under the largest debt restructuring in history. Getting those funds is central to pumping liquidity back into a cash-starved economy in its fifth year of recession.

Greece raised 1.1 billion euros by selling 26-week Treasury bills yesterday, with the yield dropping to 4.54 percent from 4.68 percent at the previous auction.

Democratic Left leader Fotis Kouvelis, who brings 17 lawmakers to the total of 179 votes backing Samaras’s government, said growth will be a key determinant in how his MPs vote on the measures. The package is expected to be brought to Parliament in the second half of the month and approval is expected, as in the past, to be a condition of the next loan payment being paid.

Stable Leadership

“It’s not enough for the package to be agreed by the three leaders and the troika,” said Lefteris Farmakis, a strategist at Nomura International Plc in London. “ It needs to be passed through parliament with a clear majority that doesn’t threaten the government’s stability. The government is trying to synthesize conflicting approaches, bound by an unrealistic post- election agreement.”

Kouvelis is fending off criticism that the package is more of the same medicine that has plunged Greece into the worst economic slump since World War II. He has said a labor-reserve plan to reduce the number of state employees is a “fiasco” that will add to Greece’s “army of unemployed.” The jobless rate rose to a record 23.1 percent in May, the Athens-based Hellenic Statistical Authority reported on Aug. 9.

Pasok leader Evangelos Venizelos, the former finance minister who brokered the second rescue package in February, has also objected to pension and wage cuts, saying they should target specific groups rather than be across the board.

Delayed Pain

In a bid to stem possible defections from his party, Samaras said Aug. 30 that this “painful, necessary” package will show creditors the country is serious about meeting its commitments. He also vowed it would be “the last of its kind.”

The coalition partners agree on seeking another two years to implement the measures, in order to diffuse the impact and give the economy a chance to recover. Bank of America analysts estimated in an Aug. 22 note that Greece needs a minimum of 5 billion euros and as much as 20 billion euros to close its funding gap, and at least 40 billion euros to bring debt dynamics back on track.

The inconclusive May 6 ballot and the June 17 vote that brought Samaras to power gave gains to the Syriza party, which opposes the country’s bailouts from the EU and IMF even at risk of ditching the euro. Syriza is now Greece’s biggest opposition party.

Alexis Tsipras, Syriza’s head, said Aug. 27 that Samaras’s bid for another two years was “like asking for more rope to hang ourselves with.”

Greece has to reduce its budget deficit to 7.3 percent of gross domestic product this year from 9.1 percent in 2011, and cut its primary deficit, which excludes interest payments, to 1 percent from 2.4 percent.

Vamvakidis said there’s “no way the troika will pull the plug on Greece” unless the government fails to stick with the program.

“But there is also no way the troika will give more money to Greece if program implementation remains as problematic as before or the coalition government collapses,” he said. The challenge in Parliament is “make or break,” he said.

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net


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