Confidence in Greek Debt Sinks Again – NYTimes.com


Confidence in Greek Debt Sinks Again

April 26, 2010

BERLIN — Chancellor Angela Merkel kept up the pressure on Greece on Monday, demanding deeper cuts over three years in exchange for approval of an international bailout. At the same time, her finance minister, Wolfgang Schäuble, was preparing the ground for quick passage in the German Parliament, saying the stability of the euro was at stake.
Amid the uncertainty, investor confidence in Greek assets sank to a new low, and the euro fell as well.
On top of questions about when the aid package of up to €45 billion, or $60 billion, might be delivered, fears are increasing that even with funds in place, Greece will have to restructure its debts, with investors liable to book losses and see the duration of the assets they hold extended.
“Germany wants to help,” Mrs. Merkel said in Berlin. But she insisted that any agreement by Germany to lend its share of the package — €8.3 billion — depended on Greece’s meeting new conditions set out by the International Monetary Fund and the European Union.
Greece has to accept “hard measures,” and that does not mean adopting a program for only a year, Mrs. Merkel said. “The International Monetary Fund’s program is for three years. I think that is right and important.”
“When Greece accepts these tough measures not for one year but several, then we have a chance for a stable euro,” she added.
When the idea of a Greek bailout was first floated this year, the assumption had been that an international aid package would buy Greece the time to pay down its debt — estimated by the European Union at 115 percent of national output.
That confidence has now slipped as investors focus on the long-term debt pile, which continues to grow as the cost of refinancing mounts. Investors appear unwilling to wait the months that it would require to see an improvement in Greek budget deficit from the austerity measures being implemented.
Despite Athens’s official request for an aid package from its euro-zone partners and the International Monetary Fund on Friday, the yield on 10-year Greek bonds rose again Monday — to 9.4 percent. That is yet another record since Greece joined the euro.
“There’s an assumption that €45 billion will be inadequate,” said Robin Marshall, director of investment management at Smith & Williamson in London.
He estimates that Greece will need to refinance up to €60 billion in bonds that are maturing during the next three years in addition to meeting interest repayments.
Also, the lack of a plan for Greece to either leave the euro area, which might help the situation by allowing it to devalue its currency, and the absence of a formal mechanism for the transfer of funds inside the Union has laid open the structural weakness of the euro area.
On top of that, domestic political wrangling in Germany ahead of an important regional election next month has led to doubts about how swiftly the aid will be transferred.
“The negotiations are still going on,” Mrs. Merkel said. They might be wrapped up by early May, she added.
Mr. Schäuble said Monday that it might be possible to complete legislation granting Greece financial aid on May 7, in time to enable Athens to refinance €8.5 billion in bonds that mature May 19.
There is added danger for Germany and France in delaying financing: Banks in those two countries retain significant holdings of Greek debt so any default by Greece could have broader implications.
Politicians from across the spectrum in Germany have demanded that private lenders participate in the financial assistance package for Greece.
Mrs. Merkel had wanted to postpone any decision about the financial aid package to Greece until after the elections in North Rhine-Westphalia on May 9.
There, as at the federal level, the conservatives are in coalition with the Free Democrats. But opinion polls show that the coalition will not win enough votes to form the next government, meaning it may need the support of a third party if it wants to remain in power.
The German public has opposed any major bailout of Greece, something which Mrs. Merkel has had to accept. Still, after adopting a hard line toward Greece, the German government seems reconciled to the idea of lending Greece around €8 billion. That would make it the biggest contributor of the total loan package.
At the federal level, Mrs. Merkel’s coalition has a comfortable parliamentary majority, so it is highly likely that she will be able to push the measures through. Still, her coalition partners, the pro-business Free Democrats, said over the weekend that they would not support any “blank check” for Greece.
Mr. Schäuble spent Monday morning explaining to finance experts from all the political parties the details of the financial aid package and what legislation would be needed. Later at a news conference, he referred repeatedly to the stability of the euro.”
“Our national responsibility is connected to Europe and will be guaranteed,” said Mr. Schäuble. He even asked Germans to be “more friendly” to their European partners. “It is not about judging the individual behavior of people in individual countries. It is about the question of one currency. This common European currency must remain stable.”
On Sunday, in an interview with the German newspaper Bild am Sonntag, Mr. Schäuble had warned that Greece could lose financial aid any time it failed to meet E.U. demands on fiscal discipline.
Away from Berlin there were more conciliatory comments toward Greece on Monday.
President Nicolas Sarkozy of France released a statement after a bilateral meeting in Paris with the president of the European Commission, José Manuel Barroso, highlighting the need for “rapid and resolute action against the speculation that is targeting Greece, in order to ensure the stability of the euro zone.”
Speaking Monday in New York, the French economy minister, Christine Lagarde, said the possibility of restructuring Greek debt was “off the table,” according to Reuters.
While most European stock markets were higher in afternoon trading — the CAC 40 indicator was up 1 percent in late trading in Paris — the main benchmark index in Athens was down 2.9 percent.
The yield on Irish and Portuguese debt also climbed amid concerns that those countries would also struggle to pay down their mounting debts.

Matthew Saltmarsh reported from Paris.

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