EU Demands Greece Act on Deficit as Bloc Crafts Aid Plan ($34B)

lite1067

EU Demands Greece Act on Deficit as Bloc Crafts Aid Plan

By Simon Kennedy and Maria Petrakis

Feb. 28 (Bloomberg) -- European Union governments are piecing together a possible rescue package for Greece as they demand it first intensifies efforts to slash the bloc’s biggest budget deficit.

With EU Monetary Affairs Commissioner Olli Rehn flying to Athens tonight for talks, German lawmakers say euro-area officials are crafting a plan to grant Greece about 25 billion euros ($34 billion) in aid should the need arise, possibly by using state-owned lenders such as Germany’s KfW Group to buy its debt.

Luxembourg Prime Minister Jean-Claude Juncker signaled today that Rehn will use his visit to warn Greece it must do more to regain control of its budget and can’t rely on taxpayers elsewhere to help until it does. Adding to the political pressure, the fiscal strategy of Greek Prime Minister George Papandreou’s government may soon be tested by investors as it readies a sale of as much as 5 billion euros of 10-year notes.

“Greece won’t be allowed to sink on the condition it respects its commitments to stabilize its budget,” French Finance Minister Christine Lagarde told Europe 1 radio today. “We have a certain number of proposals in the euro zone, involving either private partners or public partners or both.”

March 16 Deadline

Rehn arrives in the Greek capital after a week in which European officials pored over the government’s books to verify it’s doing enough to knock 4 percentage points off its budget deficit from last year’s 12.7 percent of gross domestic product. The country has until March 16 to satisfy other governments that its plan is on track and risks being pushed to increase consumer taxes and cut capital spending if it can’t show sufficient progress.

“Markets still don’t believe that the Greek people are willing to accept such bitter medicine or that the government has the will to see this through,” said Razeen Sally, co-director of the Brussels-based European Centre for International Political Economy.

Juncker, who speaks for euro-area finance ministers, today indicated more will be demanded. Greece needs to “take additional actions” to reduce its shortfall and “must understand that the taxpayer in Germany, Belgium or Luxembourg isn’t prepared to correct the mistakes of Greek fiscal policy,” he told Eleftherotypia newspaper.

‘Meet the Challenge’

Papandreou told the Greek parliament on Feb. 26 that the nation will “meet the challenge with whatever cost and pain we will need to go through.” Government spokesman George Petalotis said in an interview the same day that the country will consider taking more measures if the EU evaluations deem it necessary.

Greece needs to raise 53 billion euros this year and faces more than 20 billion euros of bond redemptions by the end of May, according to data compiled by Bloomberg. It vows to reduce its budget gap below the EU limit of 3 percent of GDP in 2012.

KfW’s purchase of Greek bonds, backed by German government guarantees, would be an emergency measure as it would risk inviting investors to speculate against other euro region countries, the German lawmakers said on condition of anonymity because the information is confidential. France’s state-owned Caisse des Depots may also be involved, Greece’s Ta Nea newspaper reported yesterday, while the Wall Street Journal said today the plan may run as large as 30 billion euros.

Deutsche Bank CEO

EU leaders ordered the country on Feb. 11 to cut its budget deficit, while promising “determined” yet unspecified action to help if needed. Papandreou is scheduled to meet German Chancellor Angela Merkel in Berlin on March 5 and President Barack Obama in Washington on March 9. He met Deutsche Bank AG Chief Executive Officer Josef Ackermann on Feb. 26.

Complicating the country’s efforts this week were another round of strikes and warnings from Standard & Poor’s and Moody’s Investors Service that they may soon cut Greece’s debt rating if the government flounders in reducing its deficit.

Investors continued to question its strategy this week. Greek two-year yields rose by as much as 75 basis points on Feb. 25, the most since Jan. 20. The spread between 10-year German bunds and Greek securities of a similar maturity widened 12 basis points in the week to 330 basis points.

CDS Down

Still, the cost of insuring against default on Greek government debt fell for the first day in a week on Feb. 26 on speculation the nation will pledge tougher measures. Credit-default swaps on Greece dropped 35.6 basis points to 364.02, according to CMA Datavision. The contracts are down from Feb. 4’s record 428.25 basis points.

The government intends to sell 10-year notes by early March, according to a Jan. 26 statement from the Public Debt Management Agency. Fund managers who may take part in the issue say Greece must offer the biggest premium over benchmark German debt since 1998, paying a coupon of about 7 percent.