Papandreou Gives EU One Week to Seal Aid Plan as Germany Pushes IMF Option

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George Papandreou, Greece’s prime minister, gestures during a press briefing at the European Union Parliament headquarters in Brussels, on March 18, 2010. Photographer: Jock Fistick/Bloomberg

March 18 (Bloomberg) — Greek Prime Minister George Papandreou set a one-week deadline for the European Union to craft a financial aid mechanism for Greece, challenging Germany to give up its doubts about a rescue package.

Papandreou said he may turn to the International Monetary Fund to overcome Greece’s debt crisis unless leaders agree to set up a lending facility at a summit March 25-26. The IMF option has already been dismissed by European Central Bank President Jean-Claude Trichet and French President Nicolas Sarkozy, who say it would show the EU can’t solve its own crises.

“It’s an opportunity to make a decision next week at the summit,’’ Papandreou told reporters in Brussels today. “This is an opportunity we should not miss. When you have that instrument in place, that could be enough to tell the markets hands off, no speculation, let this country do what it’s doing.”

Greece pinned its hopes on the Brussels summit as German officials voiced qualms about an EU-led rescue, potentially backtracking on a commitment hammered out by finance ministers just three days ago. Greek bonds and the euro fell.

‘Game of Chicken’

Greece, which was brought to a standstill on March 11 by the second general strike this year to protest government austerity measures, needs to raise about 10 billion euros ($14 billion) to refinance bonds that come due on April 20 and May 19. Papandreou said Greece cannot afford to keep paying current market rates.

“Don’t underestimate the game of chicken that’s being played right now between Greece, the EU and the IMF,” Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., told Bloomberg Radio. “I suspect at the end of the day, the IMF will come in, but it’s going to be a bumpy process.”

The yield on Greece’s 10-year government bond rose 17 basis points to 6.26 percent at 4 p.m. in Brussels. The euro fell for a second day against the dollar, slipping as much as 0.7 percent to $1.3648. Credit-default swaps on Greek sovereign debt rose 7 basis points to 295, the highest in a week, according to CMA DataVision prices.

“There’s a good deal of brinkmanship involved to get the EU and euro group members to come up with a more concrete plan,” said Klaus Baader, co-chief European economist at Societe Generale in London. “It’s also directed at capital markets, to reassure markets that Greece is not about to go into default.”

German Resistance

Opposition to handouts for Greece escalated in Germany, Europe’s largest economy, the biggest stakeholder in the ECB and biggest contributor to the EU’s budget. In the Netherlands, a traditional German ally in European fiscal debates, a parliamentary majority is against a loan for Greece, Financieele Dagblad reported today,

German Chancellor Angela Merkel yesterday ruled out “overly hasty” aid pledges, shifting the pressure back to Greece to fix Europe’s biggest budget deficit. Signs of a split in the German government emerged after Finance Minister Wolfgang Schaeuble endorsed a European solution at an EU meeting on March 15.

Attempting a rescue of Greece “without the IMF would be a very daring experiment,” Michael Meister, financial affairs spokesman for Merkel’s Christian Democratic Union, said in an interview yesterday. “Nobody apart from the IMF has these instruments.”

‘Worst of IMF’

Papandreou toyed with the idea of going to the Washington- based fund, saying today that Greece is already living in an IMF-style fiscal corset without the financing that goes along with it.

“We are under a basically IMF program,” he told a European Parliament committee earlier. “We don’t want to be in a situation where we have the worst of the IMF, if you like, and none of the advantages of the euro.”

The IMF stands ready to respond to a Greek aid appeal, which hasn’t come yet, spokeswoman Caroline Atkinson told reporters in Washington today. Papandreou said he still prefers a European solution and that the EU announcing more explicit support for Greece would be enough to bring down borrowing costs without the need to actually tap emergency funds.

The risk premium on Greek 10-year bonds has more than doubled since the beginning of November on concern about the country’s ability to bring down last year’s deficit of 12.7 percent of gross domestic product, the largest in the euro’s 11- year history. Greek 10-year yields were 314 basis points over German yields today, the widest spread since March 11.

Aid Request

“If the spread does not narrow ahead of the redemption of an 8.2 billion-euro Greek bond on April 20, Greece may ask for financial support,” Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London, said in a note to investors.

Elected in October on a platform of higher salaries and spending, Papandreou’s government has passed three packages of deficit reduction measures this year to try to convince the EU and investors it is serious about bringing the deficit down to 8.7 percent of GDP.

Papandreou said the belt-tightening measures, endorsed by European governments this week, will fail unless Greece can get access to 10-year interest rates closer to the 3.10 percent paid by Germany, Europe’s lowest.

The IMF would be the quickest route to more affordable borrowing, since it can make short-term loans at around 1.5 percent, said Carsten Brzeski, an economist at ING Group in Brussels who used to work at the European Commission. EU lending rates would be at least 3.5 percent, he said.

“Merkel is stuck,” said Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin. “If it’s just a matter of the pricing of the bonds, then she cannot argue that a bailout is absolutely needed to avoid a devastating economic storm in the euro area. That’s her conundrum.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net

Last Updated: March 18, 2010 12:08 EDT
By James G. Neuger and Jonathan Stearns

Source: Bloomberg

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