Greek PM in race for pledges to lower interest rate burden

Funding crisis cripples Athens’ ability to work way out of debt

Bloomberg in Athens
20 March 2010

Greek Prime Minister George Papandreou is racing to secure an explicit pledge of European aid and cut his country’s borrowing costs as €20 billion (HK$210.54 billion) of debt comes due in the next two months.

With investors still demanding Greece pay three percentage points more than Germany on its 10-year debt, Papandreou says Greece cannot afford to hold out much longer at current market rates. His government still needs to raise a further €10 billion to repay bonds maturing on April 20 and May 19.

“Greece wants to bring down its funding costs fast,” said Holger Schmieding, the chief European economist at Bank of America-Merrill Lynch in London, in a note to investors. If the spread does not narrow in the next month, “Greece may ask for financial support”.

Papandreou’s appeal to the European Union to help him steer interest rates lower is being stymied by a deepening split among the bloc’s leaders. While French President Nicolas Sarkozy said the euro region would rescue Greece if necessary, German Chancellor Angela Merkel’s government on Thursday signalled it is ready to turn its back on Greece and force Papandreou to seek International Monetary Fund assistance.

The yield on Greece’s 10-year bonds rose 18 basis points to 6.283 per cent on Thursday, pushing the spread with German counterparts to 316 basis points.

Papandreou said Greece deserved better treatment after presenting an austerity programme on March 3 so harsh that it sparked the second national strike in less than two months.

“We are under a basically IMF programme,” he said on Thursday. “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.”

Papandreou said the surge in Greek yields meant it was paying €725 million more on €5 billion of bonds it sold this month than Germany would to borrow the same amount. Greece would have to pay at least 3.25 per cent for IMF funds, based on what the lender is charging at current global interest rates.

Papandreou is nevertheless struggling to convince Merkel’s government that his woes are so severe that Greece warrants a bailout.

That explains why Merkel has begun pointing to the IMF as key to any planned financial aid for Greece just days after euro-area finance ministers agreed to a framework to provide loans to Greece.

“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.”

Opposition to handouts for Greece has escalated in Germany, the main contributor to the EU’s budget.

Merkel on Wednesday ruled out “overly hasty” aid pledges. 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.

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

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