Greece Says Bonds an ‘Opportunity’ as Deficit Falls

Greece's Finance Minister George Papaconstantinou
Greece's Finance Minister George Papaconstantinou plans the first in a series of meetings with investors in Europe next week to brief them on Greece’s progress. Photographer: Kostas Tsironis/Bloomberg

Greek government bonds are no longer “something to fear” and the country is on track to meet its budget goals for this year, said Finance Minister George Papaconstantinou.

“We feel confident that given where we are at the moment there won’t be any problem in hitting the target” for cutting the deficit, Papaconstantinou said in an interview in Athens yesterday. That will help secure Greece’s return to markets next year and convince investors that its bonds “are now becoming an opportunity rather than something to fear,” he said.

Fund managers are still reluctant to buy Greek debt after the country was forced to turn to the European Union and the International Monetary Fund for a bailout earlier this year. The extra yield that they demand to hold Greek 10-year bonds compared with German bunds rose as high as 957 basis points yesterday, 16 points short of the record touched on May 7.

Papaconstantinou plans the first in a series of meetings with investors in Europe next week to brief them on Greece’s progress. Fund managers dumped Greek bonds after the government last year announced a budget shortfall worth 13.6 percent of gross domestic product, the second highest in the EU.

Greece plans to cut the deficit to 8.1 percent of GDP this year and 7.6 percent in 2011. The yield on Greece’s 10-year government bond was little changed after the remarks, trading at 11.69 percent at 10:40 a.m. in London.

Wage Cuts

The country faces a second year of recession as Prime Minister George Papandreou’s government cuts wages and raises taxes to satisfy the terms of the 110 billion-euro ($126 billion) in emergency loans from the EU and the IMF.

Cuts in wages, pensions and investment have compensated for a lag in government income, Papaconstantinou said. Revenue collection will improve by the end of the year, he said. The central government deficit shrank 40 percent in the seven months to July.

Yields for Greek bonds remain high, as they do for all European countries, because the market is waiting to see whether the country will stay the course on deficit cuts, he said. Norway’s sovereign wealth fund, the second largest in the world, says it’s bought Greek securities and doesn’t expect the country to restructure its debt.

The spreads on Irish and Portuguese bonds today were 371 basis points and 353 basis points respectively.

Greece plans to sell bills this month and Papaconstantinou said it’s likely the finance ministry will opt for three-month and six-month securities rather than 12-month bills.

‘Good Yields’

“There’s no need to do a longer period when you’re not happy with the interest rates available,” said Papaconstantinou.

Greece’s debt management head, Petros Christodoulou, said in a separate interview with Bloomberg today that the country’s debt is a “good opportunity” to “pick up good yields.”

Greece’s recession this year may be less severe than the 4 percent contraction forecast in May, Papaconstantinou said. With budget cuts on track, that will help lead to “a change of setting for the international market, a whole new environment.”

Some austerity policies taken this year will spill over into 2011, meaning fewer new measures will be needed, he said.

Papaconstantinou said not all the measures are set in stone. In a bid to shore up growth, he would consider an alternative to a sales-tax increase on some goods that was slated to raise 1 billion euros for next year’s budget. Alternative steps would need to be vetted by the officials from the EU, IMF and European Central Bank, dubbed the troika.

‘Further Drag’

“We don’t want to take any measures which will be a further drag on growth,” he said. “If we can find and agree also with the troika good alternatives, we will go with them. It’s a question of mix of instruments, not of changing the targets. The targets remain the same.”

Wage cuts and tax increases have damped spending and boosted inflation. Gross domestic product in the second quarter shrank 1.8 percent from the first quarter, when it fell 0.8 percent, the Athens-based Hellenic Statistical Authority said yesterday. From a year earlier, GDP declined 3.7 percent, more than an original 3.5 percent forecast on Aug. 12.

The government forecast a contraction of 2.6 percent in 2011 before a return to growth in the following year.

Tax increases on fuel, alcohol and tobacco have boosted the inflation rate to a 13-year high. The August rate held at 5.5 percent, the same as July and the most since Greece adopted the euro in 2001, the statistics authority said Sept. 7.

Greek Jobless

Greece’s unemployment rate climbed to 12 percent in May, according to the latest data from the agency.

Papaconstantinou said the brunt of the austerity measures will be felt in the third quarter. Structural reforms such as changes to the pension, labor and taxation systems as well as budget planning will also start to kick in, he said.

He ruled out a debt restructuring, saying that more and more analysts are coming to the opinion that it won’t happen and that such a step would be “absolutely catastrophic.”

Papaconstantinou also Greece is overhauling the country’s method of producing statistics after understated deficit figures last year sparked Europe’s sovereign debt crisis. Greece’s last government was criticized for concealing budget shortfalls through swaps and other financial instruments.

“The statistics now reflect the guarantees which have been called, they reflect swaps that were not reflected and there is a clear and complete break with past practices,” he said.