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June 20, 2011

Europe Fails to Agree on Greek Aid Payout
By James G. Neuger and Stephanie Bodoni – Jun 20, 2011 8:12 AM GMT+0700

European governments failed to agree on releasing a loan payment to spare Greece from default, ramping up pressure on Prime Minister George Papandreou to first deliver budget cuts in the face of domestic opposition.

On the eve of a confidence vote that may bring down Papandreou’s government, euro-area finance ministers pushed Greece to pass laws to cut the deficit and sell state assets. They left open whether the country will get the full 12 billion euros ($17.1 billion) promised for July as part of last year’s 110 billion-euro lifeline.

“We forcefully reminded the Greek government that by the end of this month they have to see to it that we are all convinced that all the commitments they made are fulfilled,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a euro-crisis meeting in Luxembourg.

Decisions on the next payout and a three-year follow-up package were put off until early July, prolonging Greece’s fiscal agony and heightening the brinksmanship that has marked Europe’s handling of the unprecedented debt crisis.

The seven-hour finance ministers’ meeting coincided with the start of a three-day Greek parliamentary debate in Athens over a confidence vote in a new cabinet at what Papandreou called a “critical crossroads.” Papandreou has 155 seats in the 300-seat parliament.
Referendum Proposal

The Greek premier said he planned to hold a referendum later in the year on a constitutional revamp with the goal of tackling the root causes of Greece’s debt and deficits that are “symptoms of the illness, not the cause.”

Papandreou travels to Brussels today to meet European Union President Herman Van Rompuy and European Commission President Jose Barroso. The confidence vote is scheduled for late tomorrow. The Greek crisis is set to dominate an EU summit in Brussels on June 23-24.

“The communication cacophony surrounding the policy response in our view is one of the reasons why the risk of contagion has remained and remains high,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London.

The euro meeting was flanked by a teleconference of Group of Seven financial officials, two weeks after President Barack Obama singled out Germany as the key country responsible for preventing an “uncontrolled spiral of default” in Europe.

Prospects for a second aid package to stave off the euro area’s first default had been enhanced by last week’s decision by German Chancellor Angela Merkel to drop calls for a mandatory bond exchange that might lead credit rating companies to declare Greece unable to pay its bills.
Merkel’s Concession

Merkel’s June 17 concession gave a lift to stocks, bonds and the euro, spurring optimism that Europe would get ahead of the debt crisis that has exposed the weaknesses of the 17- country currency union.

While the German gesture buoyed Greek bonds, the 10-year yield of 16.94 percent remains almost 14 percentage points above the yield on German bonds, Europe’s safest investment. Standard & Poor’s on June 13 cut Greece by three levels to CCC, branding it with the world’s lowest debt grade.

Speculation that Greece will default has bled into other European markets, leading economists such as Nouriel Roubini to predict that the 17-nation euro, the high point of Europe’s economic integration, won’t survive in its current form.

“I don’t rule out that Greece and Portugal, if they aren’t able to recover competitiveness and growth and social tension further increases, may go back to the drachma and escudo on the wave of populist governments,” Roubini, head of Roubini Global Economics LLC, told Italy’s Il Sole 24 Ore on June 18.
Spanish Spread

Ireland and Portugal followed Greece in obtaining emergency loans in the past year. Spain’s finances came under the microscope last week, with investors pushing the extra yield on 10-year Spanish bonds to 261 basis points, the highest weekly close since January.

Moody’s Investors Service said June 17 it may cut its Aa2 rating on Italy, with 2010 debt of 119 percent of gross domestic product, Europe’s second highest after Greece.

Greece needs to cover about 4 billion euros of bills maturing between July 15 and July 22, and faces about 3 billion euros of coupon payments in the month, according to Bloomberg calculations. A bigger test comes Aug. 20 when Greece must redeem 6.6 billion euros of maturing bonds.
Venizelos Commitment

The new Greek finance minister, Evangelos Venizelos, who was named in Papandreou’s cabinet overhaul three days ago, came to Luxembourg with a “strong commitment” to the planned 78 billion euros in budget cuts that provoked street protests last week.

“We can achieve our target thanks to the efforts of our people and thanks to the cooperation and the assistance of our partners,” Venizelos said.

More than 47 percent of 1,208 Greeks surveyed by Kapa Research SA for To Vima newspaper oppose the wage and spending cuts and higher taxes, and want early elections. Almost 35 percent said the package should be approved.

Germany, which as Europe’s largest economy is the biggest guarantor of the aid packages to Greece, Ireland and Portugal, insists on an “ambitious” economic overhaul in Athens, Finance Minister Wolfgang Schaeuble said.

“It also depends on Greece making the necessary decisions with a fundamental consensus of the political parties so that we can be confident that Greece will live up to its commitments,” Schaeuble said.
Greek Rollovers

The key plank of a second aid package would be a pledge by banks, insurance companies and asset managers to buy new Greek bonds to replace maturing ones, instead of European governments stepping in with taxpayers money.

In a statement, the ministers said the unlocking of fresh aid depends on working out “voluntary private sector involvement in the form of informal and voluntary rollovers of existing Greek debt at maturity.”

While Germany bowed to European Central Bank and French demands not to compel investors to buy new Greek bonds as old ones expire, the lines are blurry between a “voluntary” and “compulsory” rollover that would lead rating companies to declare Greece in default.

On the table are incentives for bondholders to maintain their exposure to Greece.

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