Greece Buys Time As Europeans Press to Conclude Bailout

Riot police barricade government offices in Greece to stave off protests against the imposition of new austerity measures inside this European state. The parliament voted to approve even more draconian cuts to the living standards of workers., a photo by Pan-African News Wire File Photos on Flickr.

Greece Buys Time as Europeans Press to Conclude Bailout

Sunday, July 3, 2011

July 4 (Bloomberg) -- Europe pulled Greece back from the brink of default, gaining time to hammer out a formula for ending the debt crisis.

European finance ministers authorized an 8.7 billion- euro ($12.6 billion) loan payout to Greece by mid-July, basing a second three-year bailout package on talks to corral banks into maintaining their Greek debt holdings. A proposed debt rollover plan for Greece may still put the country in "effective default," Standard & Poor's said today.

"For markets, what matters is that Greece has got the money to navigate through the summer," said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London. "For the private-sector involvement, there is clearly a lot to discuss, but I think they will deliver before September."

Europe's agreement on July 2 to make the payout climaxed a pivotal week for Greece and the euro, providing a respite from the political tensions, clashes with central bankers and jousting with investors that have dogged the crisis-fighting effort. The finance chiefs gather next week to tackle Greece's long-term lifeline.

Bonds, Stocks

Financial markets offered breathing space as well, with Greece's escape from imminent default triggering gains last week in the euro, European stocks and the bonds of fiscally stretched countries such as Spain and Italy.

The euro pared gains after the S&P comments today, trading little changed at $1.4535 as of 3:27 p.m. in Tokyo, after rising as much as 0.4 percent earlier.

Greek parliamentary passage of new budget cuts last week gave euro-area governments political cover to release the funds, part of the 110 billion-euro bailout offered when Greece became the first victim of the crisis in May 2010.

Prospects for turning the savings legislation into reality are clouded by a lack of opposition support and public hostility that boiled over into pitched battles between teargas-spraying police and rioters outside the Athens parliament last week.

Responding to his counterparts' decision, Finance Minister Evangelos Venizelos said that it is critical for Greece to deliver "prompt and effective implementation" of the 78 billion-euro of austerity measures.

IMF Contribution

In the meantime, the International Monetary Fund indicated that it is moving toward putting up its promised 3.3 billion-euro contribution to the next installment, responding to the European pledge by saying that it is prepared to "consider" doling out its share.

"We look forward to continue working with the Greek authorities and the European partners in support of the economic program that will contribute to restoring fiscal sustainability," the IMF said in a July 2 statement.

The twin disbursements will help Greece roll over about 4 billion euros of bills maturing between July 15 and July 22, plus about 3 billion euros of coupon payments in the month, according to Bloomberg calculations. A bigger test looms Aug. 20 when 6.6 billion euros of bonds fall due.

Contingency plans are being drawn up for the "unlikely" event of the euro area's first default, said Finance Minister Wolfgang Schaeuble of Germany, which as Europe's biggest economy is the principal underwriter of the bailout.

Preparing for Default

"As a responsible government, of course we are preparing for the unlikely event that there will be, against all expectations, a Greek default," Schaeuble told Spiegel magazine in an interview released yesterday. He vowed to prevent "uncontrollable" repercussions.

Greece, said by the IMF to be "on track" in February, veered off course in April with the disclosure of a higher- than-planned deficit for 2010, forcing Prime Minister George Papandreou's government to wring extra savings out of this year's budget.

Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro-area finance ministers, voiced confidence that Greece's woes won't spread to the rest of Europe.

'Way Back'

Ireland and Portugal, beneficiaries of 146 billion euros in aid, are "on their way back to the capital markets," Juncker said in a Focus magazine interview published yesterday. He saw "no danger" for Italy and Belgium.

Finance ministers from the 17 euro countries next meet July 11 to work on Greece's next rescue, which Austria last week said may add as much as 85 billion euros to the bill for keeping the country financially sound.

Officials played down expectations of a final package next week, citing discussions with banks and insurers to reinvest in maturing Greek bonds in a way that doesn't lead credit-rating companies to declare Greece in default.

"Consultations with Greece's creditors are under way in order to define the modalities for voluntary private-sector involvement with a view to achieving a substantial reduction in Greece's year-by-year financing needs, while avoiding selective default," euro-area finance chiefs said in a statement after their July 2 conference call.

Bank Lending

Europe is inching toward a goal of getting banks to roll over 30 billion euros of Greek bonds, instead of opening a hole for the official lenders to fill. French banks, with the biggest exposure to Greece, worked out a rollover formula that is serving as an example elsewhere.

Bank of France Governor Christian Noyer, a member of the European Central Bank council, said the proposal is "very good" and may make Greece's program more credible, according to an interview in yesterday's Athens-based Proto Thema newspaper.

S&P said in its statement that the debt rollover plan may put Greece in "effective default" and the country's "uncertain ability" to implement the revised EU-IMF program is a "key risk weighing on its credit standing."

S&P Rating

The rating company's downgrade of Greek debt to CCC from B last month "reflected our view of the rising risk that an enhanced official financing package addressing the Greek government's 2011-2014 financing needs could require private sector debt restructuring in a form that we would view as an effective default of its debt obligations under our ratings criteria," it said.

German banks, insurers and so-called bad banks pledged last week to buy 3.2 billion euros of maturing Greek bonds. Allianz SE, Europe's largest insurer, puts its share at 300 million euros, spokesman Christian Kroos said yesterday.

Other obstacles to a new official loan package include demands by Finland that Greece put up collateral and rejection by one of the four parties in Slovakia's ruling coalition.

--With assistance from Maria Petrakis in Athens, Rebecca Christie in Brussels and Jana Randow in Frankfurt. Editors: James Hertling, Dick Schumacher

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