EU Said to Consider Requiring Collateral for More Greek Aid

Greek Bond Yields Rise to Record, Debt Restructuring Concern
Greek and European Union flags fly outside the Bank of Greece headquarters in Athens. Photographer: Eirini Vourloumis/Bloomberg

European Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area’s first sovereign debt restructuring, said a person with direct knowledge of the situation.

Expanding the 110 billion-euro ($158 billion) lifeline Greece received last year may mean that assets or revenue from asset sales are used to secure extra funds, the person said. Demanding collateral, an idea floated last year by Finland, may help avoid a political backlash against bailouts.

European Union finance officials, who held an unannounced meeting May 6 in Luxembourg, are preparing the help to ease a debt burden that some investors say will lead to a restructuring. Other steps may include lower interest rates or longer maturities on bailout loans, said Norbert Barthle, budget spokesman for German Chancellor Angela Merkel’s ruling party.

“We’ll just have to bite the bullet,” Barthle said in an interview yesterday from his district in the state of Baden-Wuerttemberg. “We need to help Greece help itself. What’s the alternative? We don’t want to be pushed over the edge into restructuring.”

Greek bonds have tumbled since mid-April when German officials indicated they wouldn’t oppose a restructuring. Greece denied a report in Germany’s Spiegel magazine May 6 that said it threatened to withdraw from the euro.

‘Further Adjustment’

“We think that Greece does need a further adjustment program,” Luxembourg Prime Minister Jean-Claude Juncker, who chairs the group of euro-area finance ministers, said after the May 6 gathering. “We’re not discussing the exit of Greece from the euro area. This is a stupid idea -- no way.”

Greece has already received an extension on bailout loans this year and policy makers in Athens say another lengthening would help avoid a broader restructuring.

Increasing aid may run into opposition in Germany and Finland, where bailouts have sparked a backlash. Finnish Finance Minister Jyrki Katainen, who suggested seeking collateral for Ireland for its November bailout, is leading talks to form a government that may include the euro-skeptic True Finns party.

The True Finns oppose the bailout for Portugal and see a Greek default as inevitable.

“It’s a question of time before a default will happen,” Party leader Timo Soini told Bloomberg Television May 5. “The bailout doesn’t work; we have seen that in Greece.”

Speculation Dismissed

European finance chiefs and the Greek government dismiss restructuring as a possibility. “We were excluding the restructuring option which is discussed heavily in certain quarters of the financial markets,” Juncker said.

The euro slid after the Spiegel report, declining 1.5 percent in New York trading May 6 to $1.4316. U.S. stocks pared gains and Treasuries rose as reports of the meeting stoked speculation that a restructuring may be in the works.

Greek Prime Minister George Papandreou said the report of a possible euro exit was made up and the government was handling the country’s debt in the best way possible, Kathimerini newspaper reported.

Abandoning the euro would have “catastrophic” consequences, Greek Finance Minister George Papaconstantinou told Italian newspaper La Stampa. Public debt would double, consumer spending power would be “shattered” and the country would sink into a “war-like recession,” he said.

Speaking to reporters in Athens yesterday, Papaconstantinou said the government is determined to implement the bailout plan to overhaul the economy. “Markets are still jittery and we will do all that’s necessary to calm them.”

EU Agenda

Finance chiefs from France, Germany, Italy and Spain and European Union Economic and Monetary Affairs Commissioner Olli Rehn also attended the May 6 session in Luxembourg.

Beyond Greece, the agenda included the Portugal bailout, a successor to European Central Bank President Jean-Claude Trichet, whose term ends in October, and details of the crisis-fighting program to take effect in 2013, a separate European official said.

Papaconstantinou attended and briefed on the state of the Greek economy, the Athens-based Finance Ministry said in a statement, adding there was no discussion of Greece’s status as a member of the euro area.

The meeting came a year after the EU put together an unprecedented 750 billion-euro backstop on a Sunday night in Brussels to end the debt contagion that began in Greece. It hasn’t worked so far. Ireland and Portugal have since been bailed out and Greece has been forced to fend off suggestions that it was headed to default.

Restructuring More Likely

The Wall Street Journal, citing an unidentified senior euro-zone government official, reported yesterday that Greece has asked its euro-zone partners to ease the country’s deficit targets. Separately Kathimerini said the Greek government requested at the May 6 meeting an extension of the bailout program by two to four years, without saying how it got the information.

People with knowledge of the discussions said yesterday there was no discussion about extending or changing the original bailout agreement at the meeting.

“The likelihood of a restructuring of Greek market debt this year has gone up,” David Mackie, London-based chief European economist at JPMorgan Chase & Co., said in a note May 6.

Greece has about 330 billion euros in outstanding bonds, according to a May 5 report by UBS AG. The Swiss bank estimates that 22 percent is held by Greeks and Cypriots, the ECB has 19 percent and the EU and International Monetary Fund together have about 11 percent.

Greek Bonds

About 22 billion euros will mature this year and 33 billion euros next year, according to an April 29 ING Groep NV report.

Greek bonds have declined since the 2010 bailout, with yields on two-year notes reaching a euro-era record of 26.27 percent on April 28. The extra yield investors demand to hold Greek 10-year debt over comparable German bonds widened 4 basis points to 1,233. Greece was supposed to return to markets next year even as its debt peaks at 159 percent of gross domestic product.

U.K. Chancellor of the Exchequer George Osborne said EU finance ministers may recommend additional euro-region funding for Greece.

A Greek default is not inevitable, and there have been no suggestions in private or public that the country might abandon the euro, Osborne said.

“It’s inevitable we’re going to look at the Greek package and see what they can do to get through next year,” Osborne told BBC TV’s Andrew Marr Show today. “That might involve additional assistance from, for example, the euro zone,” he said.

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