European Union officials will focus on preparing a new aid package for Greece that includes a “voluntary” role for investors after the EU and the International Monetary Fund approved the fifth installment of Greece’s euro 110 billion ($161 billion) bailout.
“I expect the euro group to agree to additional financing to be provided to Greece under strict conditionality,” Luxembourg Prime Minister Jean-Claude Juncker said after meeting with Greek Prime Minister George Papandreou in Luxembourg yesterday. “This conditionality will include private-sector involvement on a voluntary basis.”
Papandreou agreed to euro 78 billion in additional austerity measures and asset sales through 2015 to secure the euro 12 billion bailout payment and meet conditions for receiving an additional rescue package. He agreed to make “significant” cuts in public-sector employment and establish an agency to manage accelerated asset sales, according to a statement released in Athens yesterday. The plan is fueling popular opposition and protests across Greece.
Greek bonds gained on the prospect of a new aid plan, with the yield on the country’s two-year notes falling 172 basis points yesterday to 22.8 per cent, the lowest since April 20. The agreements came at the end of a week when Greece’s fiscal crisis worsened enough for Moody’s Investors Service to raise the probability of a default to 50 per cent.
‘DEBT PROBLEM’
“The current discussions over the Greek debt problem have arisen mostly because of a realization that Greece won’t be able to raise money through normal bond issuance in 2012,” said Justin Knight, an analyst at UBS AG in London. “The choice for policy makers is one between funneling more aid funds into Greece to avoid default next year and restructuring debt now so that funds due to be paid to Greece under the current plan can last longer.”
A year after the rescue that aimed to stop the spread of the debt crisis, Greece remains mired in a third year of recession, shut out of financial markets and saddled with the biggest debt load in the euro’s history. Ireland and Portugal followed in seeking bailouts and Greece now needs a second rescue package to avoid the euro area’s first sovereign default.
Under the original rescue, Greece was due to sell euro 27 billion of bonds next year. EU leaders and Papandreou have acknowledged that a return to markets won’t be possible with Greece’s 10-year debt yielding 16 per cent, more than twice the level at the time of the bailout. The EU is looking to close that funding gap through new loans and bondholders’ willingness to roll over Greek debt, EU officials have said.
IMF FUNDS
Europe’s financial leaders needed to hammer out a revised Greek package to persuade the IMF to pay its share of the euro 12 billion tranche originally due in June. The IMF had indicated that it would withhold its euro 3.3 billion piece unless the EU comes up with a plan to close Greece’s funding gap for 2012. The EU-IMF statement said the full payment would be made in early July.
The Washington-based lender provided euro 30 billion of Greece’s original loans, along with a third of the loans since granted to Ireland and Portugal. Policy makers have in recent days narrowed in on bond rollovers as a pillar of any new aid package. The step would be favored by the European Central Bank, according to two officials familiar with the situation, as it would reduce the risk of any agreement being classified as a default. Investors may be given preferred status, higher coupon payments or collateral, said two other EU officials familiar with the situation. EU leaders are due to meet in Brussels on June 23-24 to approve a plan.
SPENDING CUTS
About 55 per cent of investors in Greek government bonds would likely roll over holdings of securities maturing through 2013 to help the nation manage its budget deficit, according to ING Groep NV.
Papandreou is promising euro 6.4 billion of spending cuts this year, another euro 22 billion up to 2015, and euro 50 billion in sales of assets including Hellenic Telecommunications Organization SA (HTO) and Public Power Corp SA. The pledges aim to get the deficit down to 7.5 per cent of gross domestic product and were key to securing the fifth bailout payment. Papandreou is facing a backlash against the additional measures at home.
