Doubts Are Aired on Aid to Greece

Greece police attack protesters who are demonstrating against the economic crisis affecting the country. The European Union has demanded larger cuts in salaries and services in exchange for assistance to the beleagured state., a photo by Pan-African News Wire File Photos on Flickr.

SEPTEMBER 24, 2011.

Doubts Are Aired on Aid to Greece

By GEOFFREY T. SMITH And TOM MUDD
Wall Street Journal

Germany's finance minister raised questions on Friday over whether a hard-won second bailout for Greece agreed by European leaders in July would go ahead as planned, as more official concerns emerged over Greece ability sustain its heavy debt burden without default.

Prices for Greek government bonds have collapsed in recent weeks amid growing investor doubts over whether the country can surmount a financial crisis if it doesn't cut its debts sharply.

"We now expect the Greek sovereign to engage in substantial and probably coercive debt restructuring by the end of 2012 at the latest and likely much sooner," said Citibank economists in a research note on Friday.

The German minister, Wolfgang Schäuble, hinted Friday that he expected an €8 billion ($10.8 billion) payout to Greece from euro-zone governments and the International Monetary Fund to go ahead soon, as part of Greece's first bailout agreed last year.

But he suggested the conditions for a second bailout could be changed.

EU, National Bank and Greek flags in front of the headquarters of the National Bank of Greece on Friday.

"It would surprise me if the conditions for a disbursement of the next tranche of aid in September had changed, but not if the conditions for an additional program had changed," he said at a news briefing on the sidelines of the IMF annual meeting in Washington. "However," he added, "I want to wait and see first."

Only hours earlier, the Greek Finance Minister Evangelos Venizelos vehemently denied plans, other than the one established in July, were being considered.

"Greece has taken the final decision to do everything in its power" to implement the July accord, he said.

Dutch central bank president Klaas Knot, a member of the European Central Bank's governing council, said in an interview published on Friday that he couldn't rule out Greek default.

"I had long been convinced that a default was not necessary. But the news from Athens is sometimes not encouraging. All efforts are aimed at preventing it, but I am now less certain in ruling out a default than I was a couple of months ago," Mr. Knot told the Financieele Dagblad newspaper.

The second bailout agreed to in July includes a plan for a bond exchange, in which investors would swap existing bonds for new bonds and thereby postpone a majority of Greek debt repayments due between now and the end of 2020.

Senior Greek officials said privately that some official creditors believed that bondholders should double the 21% write-down they would be required to make under the July deal.

A collapse in Greek bond prices since July has made the bond exchange much more attractive to investors. Under the exchange, the new bonds carry top-rated collateral to guarantee ultimate repayment of capital after 30 years.

On Friday, Moody's Investors Service downgraded the credit ratings of eight Greek banks by two notches. The ratings company cited losses resulting from the banks' holdings of Greek government bonds as well as increasing concerns about the impact of a recession and fragile liquidity and funding positions.

—Costas Paris in Washington and Maarten van Tartwijk in Amsterdam contributed to this article.

Write to Geoffrey T. Smith at geoffrey.smith@dowjones.com and Tom Mudd at thomas.mudd@dowjones.com