Bloomberg News

Hard-Line Politicians Soften as Greeks Deliver Cuts: Euro Credit

November 29, 2012

Policy makers in northern Europe who led austerity demands to address the debt crisis have moderated their approach after the budget-cutting prescription failed to reverse Greece’s spiral.

Dutch Prime Minister Mark Rutte said this week that Greece may need help to stay in the euro on top of the package of concessions approved Nov. 27 by finance ministers. Rutte spoke seven weeks after German Chancellor Angela Merkel’s visit to Athens ushered in a period of detente between north and south.

“There’s definitely been a softening in the stance,” Peter Bofinger, an economic adviser to Merkel, said in a telephone interview yesterday. “They’ve given in to reality. It’s obvious that there is no alternative.”

German lawmakers will vote today to ratify the amended aid plan to Greece, underscoring a shift reflected in the rally in Greek debt. Ten-year Greek bonds yield 16.36 percent, near the lowest level since its debt restructuring in March. The extra rate investors demand to hold the securities relative to German bunds was 1,468 basis points yesterday, the least in 15 months.

“They’ve come down pretty dramatically,” Ken Wattret, chief euro-area economist at BNP Paribas SA in London, said in a telephone interview. Officials “have bought some time for Greece, a couple of years, but there are underlying issues that need to be dealt with and less pressure means less progress,” he said.

Taboo Issue

The underlying issue is Greece’s debt load, which will peak in 2014 at almost twice the size of the economy. It’s a topic that remains taboo to policy makers such as Merkel and Rutte and their ally in Finland, Jyrki Katainen, even as it forces its way onto the agenda.

“There is a willingness to discuss behind the scenes official sector relief for Greece,” said Wattret. “It looks like it’s on the table.”

International Monetary Fund Managing Director Christine Lagarde has urged leaders to recognize they’ll have to forgive part of the 240 billion euros ($312 billion) pledged to Greece in two aid packages if the country’s finances are to stabilize.

The Greek economy has contracted for 17 straight quarters. It will shrink through 2014, according to the median forecast of analysts surveyed by Bloomberg.

In the latest bid to keep the euro intact, euro finance ministers agreed Nov. 27 to cut the rates on bailout loans, suspend interest payments for a decade, give Greece more time to repay and also engineered a Greek bond buyback. That would still leave Greece with debt at 124 percent of gross domestic product in 2020.

Forgiveness Seen

“Given that around 70 percent of the total debt stock is held by official creditors, only a reduction in principal on outstanding official debt would lead to a semblance of sustainability in Greece’s debt,” Moody’s Investors Service analysts said in a report published yesterday.

Rutte rejected a write-off during a Nov. 28 interview in The Hague, while German Finance Minister Wolfgang Schaeuble told local lawmakers a day earlier that such a step would present legal hurdles. Even so, both opened the door to further measures to ease the strain on Greece after the government passed cuts to pensions, public wages and benefits this month with 50,000 demonstrators massed outside the parliament.

Schaeuble ``is entirely right that you have to take a view on the situation of Greece every couple of years again, whether we are on track and whether extra steps have to be taken,” Rutte said in the interview.

Merkel Visit

Those remarks contrasted with the Dutch premier’s comments as recently as Sept. 4 when he said he would block a third package for Greece and disagreed with the proposition that everything needed to be done to keep the euro zone from breaking up. “Countries themselves need to do everything possible to remain in the euro zone,” Rutte said at the time.

Since then, Merkel, who is up for re-election next year, has visited Athens where she stood shoulder to shoulder with Greek Premier Antonis Samaras and said she wanted to keep the country in the euro. Samaras has won plaudits for delivering the budget measures creditors demanded.

The increasing sympathy shown to Greece has raised hopes for others of the so-called peripheral nations that they may also win concessions as Ireland did last year when its interest rate was cut. Portuguese Finance Minister Vitor Gaspar said Portugal and Ireland, which are receiving rescue loans, can benefit from the eased terms on the emergency aid for Greece.

Rutte has his red lines.

“I am from the Netherlands so that means we like to stick to the rules, and we like to stick to the deal and we like countries to do what they have promised,” he said.

To contact the reporters on this story: Ben Sills in Madrid at; Fred Pals in The Hague at

To contact the editor responsible for this story: James Hertling at

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