Prodi Says Lack of EU Support Hurt Greek Bond Prices

Romano Prodi, Italy's former prime minister
A file photo shows Romano Prodi, Italy's former prime minister during the political assembly in Rome. Photographer: Victor Sokolowicz/Bloomberg

Greek bonds are falling because European Union nations failed to take decisive action to restore confidence in Greece’s finances, former European Commission President and Italian Prime Minister Romano Prodi said.

Criticizing “the weakness of European solidarity” amid the most serious challenge yet for the 11-year-old euro, Prodi said weeks of conflicting signals from the EU and Germany have plunged Greece into a deeper financial hole.

“If you go on discussing weeks and weeks, and you give the message that there is no agreement, of course the rescue of the Greek economy, the correction of Greece’s budget will be more and more difficult for the simple reason that the rate of interest will be higher as is happening now,” Prodi said late yesterday in a telephone interview from Bologna, Italy.

Greek bonds fell for a seventh day today, and the yield on Greece’s 6.25 percent bonds due June 2020 topped 8.1 percent at 12:51 p.m. in Rome, the highest since 1998. The premium that investors demand to buy Greek bonds over comparable German debt widened to a record 521 basis points, the most since before the start of the euro in 1999.

Prodi, 70, shepherded Italy into the euro as prime minister from 1996 to 1998. He led the Brussels-based commission, the EU’s executive agency, from 1999 to 2004 and served again as Italian leader from 2006 to 2008.

‘Determined’ Action

European efforts to aid Greece began with a Feb. 11 pledge of “determined and coordinated action if needed” to halt its financial slide. On March 10, with Greek 10-year yields at 6.28 percent, Prodi said in an interview that the crisis was contained.

On March 25, under pressure from German Chancellor Angela Merkel, European leaders asked the International Monetary Fund to take part in any rescue package. Finance ministers from the 16 euro countries held an emergency teleconference on April 11 to lay out the terms of the proposed 45 billion-euro ($61 billion) offer.

Negotiations starting today in Athens with EU, European Central Bank and IMF officials over conditions for Greece to tap the below-market rate loans may run into early May, Greek Finance Minister George Papaconstantinou said yesterday.

“I don’t see the risk of default,” Prodi said. “I am still confident the agreement will be taken. Greece is 2 percent of European GDP. Greece is not a big quantity.”

Debt Sale

Greece sold almost 2 billion euros of three-month bills at a yield of 3.65 percent yesterday, almost double what Greece paid in a similar sale in January. The government still needs to raise almost 10 billion euros by the end of May to finance the deficit and the maturing bonds.

Prodi urged EU leaders to consider the long-term health of the euro zone rather than short-term political repercussions, singling out Germany as the country that has to show leadership.

“The Germans must understand it’s not only a German problem,” Prodi said. “All the European states will contribute in proportion to their budget. When you are on the brink, common sense will prevail.”

Greece has raised taxes, and cut wages and spending to make good on a pledge to trim the deficit by 4 percentage points this year from 12.9 percent in 2009, a reduction of almost 10 billion euros.

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