PostGreece Talks Enter ‘Final Phase’ on Second Bailout to Secure Place in Euro title

By Jonathan Stearns and Maria Petrakis
February 03, 2012 11:28 AM EST

Greece may conclude a seven-month effort to wrap up its second bailout in the coming days with the country’s stability hanging in the balance.

A plan that’s been in the works since July may emerge from parallel talks among caretaker Prime Minister Lucas Papademos’s coalition members; international monitors and Greek officials; and Greece’s government and its creditors, as well as tussles involving European central bankers and political leaders.

“We are in the final phase of this very critical process to shape a new financing program for Greece and to complete the loan agreement which will lighten the burden of public debt and ensure funding for years to come,” Papademos said in a statement today in Athens. The plan will help “restore fiscal stability, improve competitiveness, revive the economy and increase employment.”

The rescue blueprint includes a loss of more than 70 percent for bondholders in a voluntary debt exchange and loans likely to exceed the 130 billion euros ($171 billion) now on the table. Open questions involve how much more aid Greece needs, how much more austerity is required, and how to involve the European Central Bank in the debt swap.

The euro is headed for a weekly decline against all of its 16 major peers. It rose 0.3 percent to $1.3110 at 4:10 p.m. in London. The yield on Germany’s benchmark 10-year bond rose 7 basis points to 1.92 percent, while the yield on Italian 10-year bonds climbed 8 basis points to 5.68 percent.

Debt Concerns

Greece remains in intensive care more than two years after triggering Europe’s debt crisis. Even after a second bailout, it may be saddled with too much debt, too little growth and too large a budget hole to do without even more money that euro nations led by Germany are increasingly reluctant to offer.

“Greece is in deep trouble,” Holger Schmieding of Berenberg Bank in London said in a Jan. 30 report. “The current Greek adjustment program is failing. Excessive austerity, a lack of supply-side reforms, administrative incompetence and political deadlock have pushed the Greek economy into an apparent death spiral. More of the same will not work.”

As Greek officials negotiate with representatives of the so-called troika -- the European Commission, the ECB and the International Monetary Fund-- Deutsche Bank AG Chief Executive Officer Josef Ackermann may travel to Athens this weekend for talks over the swap involving Greek debt with a face value of about 200 billion euros.

Bond Swap

Creditors are prepared to accept an average coupon of as low as 3.6 percent on new 30-year bonds in the exchange, said a person familiar with the talks, who declined to be identified because a final deal hasn’t been struck yet. The aim is to cut the debt load to 120 percent of gross domestic product by 2020 from 162 percent in 2011. The alternative is an uncontrolled default that may lead to deeper losses, the collapse of its financial system and ripple effects throughout Europe.

An agreement could be reached “in the coming weeks, maybe days,” Ackermann, chairman of the Institute of International Finance, said yesterday. The group, based in Washington, has more than 450 financial firms as members and is representing private creditors in the talks.

Meantime, the finance ministers of the AAA rated euro countries -- Germany, Luxembourg, the Netherlands and Finland -- met today in Berlin to discuss options.

They didn’t discuss a higher public-sector contribution to a second aid program for Greece today, reflecting reluctance to place bigger burdens on their taxpayers, said a person familiar with the talks.

‘Bottomless Pit’

“We can’t pay into a bottomless pit,” German Finance Minister Wolfgang Schaeuble said yesterday. “Greece needs a new program, there’s no question about that, but Greece must create the conditions for it.”

Greece has lagged behind budget targets set when it won an initial, taxpayer-funded rescue of 110 billion euros in May 2010, prompting euro-area threats to cut off aid and hastening a German push to make bondholders contribute. The country is in its fifth year of recession, with a budget deficitstill close to 10 percent of GDP and unemployment of around 18 percent.

Facing a 14.5 billion-euro bond payment on March 20 and general elections as soon as April, Papademos must heed familiar calls by the euro area and the IMF for tighter austerity to complete the talks on a second aid package. The demands are also for lower wage costs and the deregulation of professions including lawyers and truck drivers.

Resignation Reports

Papademos’s spokesman, Pantelis Kapsis, denied news reports today that the premier would resign if leaders of the parties backing his interim government refused to agree to additional conditions for new financing.

The cuts risk triggering a “social explosion,” Hieronymos II, the head of Greece’s Orthodox Church, said in a statement posted on the website of the Archdiocese of Athens.

“We are being asked to take even larger doses of a medicine that has proven to be deadly and to undertake commitments that do not solve the problem, but only temporarily postpone the foretold death of our economy,” the Archbishop said.

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

Maria Petrakis in Athens atmpetrakis@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net