Europe’s Donor Nations Demand Tougher Greece Measures to Justify Extra Aid

Europe’s donor nations said Greece will need to meet tougher conditions than last year to win new aid that would avert a debt restructuring and cover almost 30 billion euros ($42 billion) of financing needs next year.

Euro-region finance ministers will meet in Brussels on May 16 to discuss more support for Greece beyond the 110 billion- euro rescue granted a year ago, Luxembourg’s Jean-Claude Juncker, who leads the group, said today in Mainz, Germany. The yield on Greece’s 10-year bond has more than doubled since the bailout to 15.6 percent, complicating its return to market.

“The Greek adjustment program hasn’t brought all the results we had expected,” Juncker said. ‘‘This program has to be bolstered in coming weeks so that Greece can return one day to financial markets, which Greece with certainty won’t be able to do in 2012.”

Politicians are struggling to convince investors that that 256 billion euros in aid to Greece, Ireland and Portugal will be enough to stamp out Europe’s debt crisis and prevent the euro region’s first restructuring. The International Monetary Fund said in a report today there is risk of contagion to the countries of eastern Europe.

Under the original bailout plan, Greece was due to sell 27 billion euros of bonds next year and a similar amount in 2013. Greece’s surging borrowing costs prompted a surge in bets the country would be forced to restructure its 330 billion euros in debt. The cost of insuring Greek bonds against default reached a record 1,371 basis points on May 9.

‘Clear Conditions’

Chancellor Angela Merkel’s government, the largest contributor to the Greek bailout, is now trying to tamp down expectations of a default after weeks of comments by German lawmakers, including members of her coalition, about the possibility of restructuring.

“If it turns out that Greece can’t return to the financial markets on the timeline laid out last year, then we have to talk about what additional measures Greece, first and foremost, can take,” Finance Minister Wolfgang Schaeuble told lawmakers in Berlin today. “We won’t be able to agree to additional measures without clear conditions.”

Finland is insisting that any new aid packages for EU countries require the recipient to put up collateral for the loans.

‘Huge Mistake’

Deutsche Bank AG Chief Executive Officer Josef Ackermann said, “There is no other solution” to more aid. “A Greek restructuring would be a “huge mistake. The losses in many areas would be too high and could provoke a contagion impact.”

European banks have $130 billion in exposure to Greece, according to Credit Suisse Group AG strategist Andrew Garthwaite.

After more than a year of austerity, which included higher taxes and cuts in wages and pensions, Greece’s budget deficit is still at 10.5 percent of gross domestic product, more than three times the EU limit. Its debt is rising and set to peak at 159 percent of GDP next year. Popular and political opposition to more cutbacks is growing, with unions holding their second general strike of the year yesterday to oppose current plans, which include selling off 50 billion euros of state assets.

Risk Rising

The talk of more aid has done little to convince investors that Greece can avoid becoming the first euro-region country to restructure debt. Greek two-year bonds yield 25.2 percent, almost 10 percentage points more than its 10-year bonds, indicating investors perceive more risk from lending to Greece for two years rather than for a decade.

“The debt levels have reached proportions which will never be financeable on the markets,” a team of Commerzbank AG strategists led by Ulrich Leuchtmann, head of currency strategy in Frankfurt, wrote yesterday in an investor report. “A further top up of the rescue packet for Greece is not going to cause risk premiums to fall.”

The German parliament’s budget committee yesterday also approved the country’s contribution to Portugal’s 78 billion- euro bailout. The Finnish government, which had threatened to try to block aid to Portugal, agreed late yesterday to support the plan, removing one of the final road blocks to freeing up the funds.

EU finance ministers will meet in Brussels on May 17 to give final approval to the aid package so that Portugal can receive its first payment before its faces a 4.9 billion-euro bond redemption next month.

To contact the reporter on this story: Rainer Buergin in Mainz, Germany, at rbuergin1@bloomberg.net

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

4:50

May 11 (Bloomberg) -- Julian Callow, chief European economist at Barclays Capital, talks about the outlook for Europe economies and sovereign debt crises. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)