Greek economic prospects darkened as European bickering risked delaying the next rescue payment and defections weakened Prime Minister George Papandreou’s majority.
An emergency session of euro finance chiefs in Brussels yesterday failed to break a deadlock on how to enroll investors in a second bailout without triggering a default, casting doubt on funds due from the International Monetary Fund (IMF) next month.
In Athens, Greek police used tear gas to disperse demonstrators around the Parliament as 20,000 people rallied against wage reductions and tax increases as lawmakers debated the budget cuts and asset sales that are conditions of the aid. Ports, banks, hospitals and state-run companies were paralysed by strikes, while a Papandreou ally said he won’t support the austerity measures and another bolted his Socialist Party.
Debt restructuring “seems to be increasingly probable,” Raghuram Rajan, a professor at the University of Chicago and a former chief economist at the IMF, said on Wednesday in Singapore. “The political will required to do what would be necessary to service the level of debt that is building up is reaching the limits of what Greece can do.”
The euro weakened 1 per cent to $1.4290 at 2.50 pm in London. The cost to insure Greek debt climbed to a record, indicating an about 75 per cent chance of default within five years.
Yields on 10-year Greek bonds jumped to 17.9 per cent, the highest in the 17-nation euro area’s history. The slump pushed the extra yield that investors demand to hold Greek 10-year bonds instead of similar maturity German bunds to a record 1,491 basis points.
Papandreou briefed President Karolos Papoulias in Athens on Wednesday, telling him, “we will proceed with imperative decisions.” German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in two days in Berlin to resolve their differences.
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Pressure to craft a rescue plan and avoid the first euro- area default intensified after Standard & Poor’s slapped Greece with the world’s lowest credit rating on June 13 and the European Central Bank (ECB)and Germany clashed over easing Greece’s debt load. At 143 per cent of gross domestic product, it’s the highest in Europe.
Shares of BNP Paribas, Societe Generale and Credit Agricole, France’s three biggest banks, dropped more than 2 per cent after Moody’s Investors Service placed their credit ratings on review to scrutinise their holdings of Greek debt.
With consensus elusive before the target date of a European Union leaders’ summit late next week, finance ministers agreed to convene again on June 19, adding a round to a gathering scheduled for June 20. Talks may drag on into July, Luxembourg’s Finance Minister Luc Frieden said yesterday.