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Greece Pressure Points Keep Default Risks Alive After Bailout: Euro Credit

Greece’s 110 billion-euro ($149 billion) rescue has failed to restrain borrowing costs as investors remain skeptical about the nation’s ability to pay its debts once the aid package expires.

“The market has substantial doubts on the longevity of any Greek rescue,” said Bill Blain, a co-head of fixed income Matrix Corporate Capital LLP in London. “Ultimately, if nothing else changes, Greece will still need a restructuring down the road.”

Greek 10-year bonds yield 11.93 percent, compared with 8.96 percent before the European Union and the International Monetary Fund agreed to backstop the nation on May 2. The cost of insuring Greek debt against default is at its highest since June 29. Investors demand 9.2 points more yield to lend to the country than to Germany, the highest premium in the euro region and near the May 7 record of 9.65 points, as bondholders question whether Greece can plug its budget shortfall.

Prime Minister George Papandreou’s efforts are hampered as tax revenue diminishes in an economy set to contract 4.2 percent this year and 3 percent in 2011. The EU’s higher estimates for the country’s 2009 debt and deficit on Nov. 15 forced the government to announce additional austerity measures to reach targets set as a condition for receiving financial aid.

“The program is at a crossroads,” Poul Thomsen, the head of the IMF’s Greece mission, said in a Bloomberg TV interview on Nov. 23. There’s been “a very, very good start, but some pressure points are evident,” he said.

Greece needs to cut health spending, rein in deficits at state-owned companies and boost tax collection, the IMF said.

Record Deficit

Finance Minister George Papaconstantinou has announced 14 billion euros of revenue measures and spending cuts that aim to trim the shortfall by 5 billion euros. The deficit will be 9.4 percent of gross domestic product this year, above an original 8.1 percent target agreed in May, and 7.4 percent next year, according to the budget. The 2009 gap was 15.4 percent, a record for the euro-area and surpassing Ireland for the region’s largest deficit.

“This remains a very ambitious program,” Thomsen said. “We’ll have an 8 percent reduction in an economy that contracts by 7 percent. That is extraordinary by any international standard.”

Budget revenue has failed to meet forecasts. Higher sales, cigarette and alcohol taxes were introduced to boost receipts by 13.7 percent this year. That goal was trimmed to 8.7 percent in October and again last week to 6 percent. The government’s income grew just 3.7 percent in the first 10 months of the year.

Still Skeptical

“We remain skeptical about its ability to cut the deficit further,” Giada Giani, an economist at Citigroup in London, wrote on Nov. 23. That’s partly due to concerns that this year’s deficit will miss the latest targets and “because we see it unlikely that meaningful improvements in tax collection will materialize in the short-term.”

Public transport and government workers are set to walk off the job for three hours today, halting ferries, buses and trains to protest Papaconstantinou’s plans to curb spending at hospitals, municipalities, and bus, trolley and rail companies. Unions plan a 24-hour strike on Dec. 15. Garbage collectors have been on strike for five days.

Papaconstantinou plans to cut 2.1 billion euros from hospital spending to reduce a health bill that amounts to more than 13 billion euros a year, or about 5 percent of GDP. The country’s 11 most unprofitable state enterprises had accumulated losses of 1.7 billion euros in 2009, more than the money the government saved this year by cutting payments to pensioners, according to Papaconstantinou.

Euro Weakness

Greece will receive 9 billion euros in December and January from the EU and IMF following this week’s assessment. That’s in addition to the 29 billion euros it’s been given since the May accord, when deficit concern pushed its borrowing costs to record highs, leaving it shut out of financial markets.

Fallout from Greece’s debt crisis has weakened the euro by 7 percent against the dollar this year, and prompted a surge in bond yields for other high-deficit euro-region countries as investors shunned their debt. Ireland is now negotiating aid to refinance its banks as borrowing costs surge, driving its 10- year yield premium versus bunds to 6.20 percentage points today and approaching the Nov. 11 euro-era record of 6.46 points. Portugal’s premium over bonds also soared to a euro-era record on Nov. 11 of 460 basis points and the yield on its 10-year bond now tops 7.2 percent.

“Systemic risk has increased in Europe’s periphery with Ireland and Portugal widening,” said Ioannis Sokos, a strategist at BNP Paribas SA in London. “This is weighing on Greek bonds as well.”

Funding Costs

Both Greece and Ireland will pay an interest rate of about 5 percent for emergency funding, compared with three-year domestic bond yields of about 13 percent and 6.8 percent, respectively.

The EU-led rescue plan for Greece aimed to restore investor confidence and also allow the country to access markets for funding by the time the program ends in 2013. Papaconstantinou repeated on Nov. 23 that he wants to resume borrowing on the international capital markets next year.

Greece’s first aid repayment is due in 2013. The IMF’s Thomsen said Nov. 23 that while he didn’t doubt Greece’s ability to resume borrowing, the maturity of its loan might still need to be extended, and that the repercussions of debt restructuring would outweigh any benefits.

Greece’s gross borrowing needs will rise to 70.8 billion euros in 2014 from 53.2 billion euros as repayments to the EU and the fund increase, IMF documents show.

“You can’t turn around Greece in 12 months,” said Blain. “Over the next three years we’re going to see continued slippage in the targets where we get to the stage of another bailout, or more likely a restructuring.”

To contact the reporter on this story: Maria Petrakis at mpetrakis@bloomberg.net

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net

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