Greece’s Cabinet endorsed another package of spending cuts and state asset sales after the worsening bond-market selloff across the euro region forced the government to step up austerity measures.
Finance Minister George Papaconstantinou is seeking financial advisers to sell stakes in Hellenic Telecommunications Organization SA, Public Power Corp SA and a number of other companies, according to an e-mailed statement in Athens today. The government also approved revenue and spending measures to reach its 2011 deficit target after falling short of its tax collection goals.
“The Cabinet today reaffirmed its determination to continue with the fiscal consolidation by taking additional measures of over 6 billion euros, or 2.8 percent of gross domestic product, to achieve the 7.5 percent deficit target for 2011,” Papaconstantinou said in the statement.
More than a year after European policy makers approved a 750 billion-euro ($1.1 trillion) bailout blueprint to stem the sovereign crisis, bond yields in debt-laden peripheral countries are at record highs and officials are floating plans to extend Greek repayments. Italy had its credit-rating outlook put on negative review by Standard & Poor’s on May 20, hours after Fitch Ratings cut Greece three levels. Spain’s ruling party was routed in local voting yesterday.
The extra yield investors demand to hold Italian 10-year bonds over German bunds rose to a four-month high of 179 basis points after S&P said it may cut the country’s credit rating. Spain’s yield spread rose to 251 basis points, also the highest since January, after the ruling socialists suffered their worst defeat in 30 years in local elections in a voter backlash against austerity.
“The bond market is the only language policy makers will listen to,” Axel Merk, chief investment officer for Merk Investments LLC said in an interview with Bloomberg Television’s Betty Liu. “Once the bond markets impose austerity on the country that’s when they follow through, when there is a backing off, when things are going better, that’s when they lapse.”
European Union demands may require Greece to sell 15 billion euros of assets by the end of 2012, a year ahead of schedule, in order to win a new three-year loan package, a person familiar with the talks said today. EU Economic and Monetary Affairs Commissioner Olli Rehn said creating a vehicle to manage Greece’s privatization program was being considered.
“The possibility to create a trust fund or a privatization agency is one option we’re exploring among several,” Rehn told reporters in Vienna today.
The government said it would sell its stake in Hellenic Postbank SA and the country’s ports in the first phase of the asset-sale program. The state’s direct 34 percent stake in Postbank has a market value of about 275 million euros. The government also said it would create a sovereign-wealth fund composed of state assets to accelerate the sale process.
The government plans to complete the stake of Hellenic Postbank by the end of the year, and to sell 75 percent stakes in Piraeus Port Authority and Thessaloniki Port Authority SA. It also intends to extend the concession for Athens International Airport this year.
Greece owns a 20 percent stake in Hellenic Telecommunications Organization, or OTE, and has the right to sell a 10 percent stake to Deutsche Telekom AG, which already has a 30 percent holding. The government is seeking financial advisers to exercise the put option, and for the sale of a further 6 percent of the company, the finance ministry said.
“With an economy still in recession, it’s very difficult to keep piling on larger amounts of fiscal tightening,” David Mackie, London-based chief European economist at JPMorgan Chase & Co., said in a conference call today. “I think instead we are moving to an environment where asset sales are going to be used as the key means of signaling Greece’s commitment here.”
Greece has a “refinancing hole” of 30 billion euros for both 2012 and 2013, according to economist Nouriel Roubini. The nation could restructure by issuing debt with lower interest payments and extend maturities as it’s unlikely the nation will “regain market access for the next five to 10 years,” he said in an interview last week.
Spanish Prime Minister Jose Luis Rodriguez Zapatero’s Socialist party had its worst electoral setback in local elections since the country’s 1979 return to democracy as voters punished the ruling party for austerity policies. The shift in power in some key regions may spark doubts over Spain’s ability to contain its deficit as newly elected officials may reveal weaker finances than their predecessors reported.
Euro-area governments also want bondholders to buy new Greek bonds to replace maturing debt, stopping short of the debt extension, or “reprofiling,” floated by Luxembourg Prime Minister Jean-Claude Juncker last week, the person said.
Such a postponement of debt redemptions would be classified as a default, Fitch Ratings said last week when it cut Greece’s credit rating by three levels to B+.
Pressure on peripheral bonds isn’t letting up because “discussion on Greece will continue, Italy’s negative outlook will reinforce risk aversion and the result of Spanish regional elections will foster speculation that the newly appointed administrations will unveil ‘hidden debt,’” Luca Cazzulani, fixed income strategist at UniCredit Research, said in a note to investors.
Greek 10-year yields jumped 49 basis points to a record 17 percent as of 3 p.m. in London, while yields on two-year notes climbed 64 basis points to 26.1 percent. Irish 10-year yields advanced 29 basis points to 10.83 percent, with Italy up 4 basis points to 4.81 percent. The yield on Spain’s 10-year bond rose 5 basis points to 5.53 percent.
Declines in so-called euro-region peripheral bonds have deepened amid speculation that Greece will need to restructure its debt as it struggles to avoid default. The nation’s securities have lost 13 percent this year, with Portugal losing 14 percent and Ireland 7.1 percent, according to indexes from Bloomberg and the European Federation of Financial Analysts Societies.
The euro fell as much as 1.4 percent to $1.3970, weakening to less than $1.40 for the first time since March 18, and depreciated to 1.23235 Swiss francs, a record.
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