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Greece Readies Crisis-Fighting Measures as Bond Yields Climb

Greece's Prime Minister George Papandreou
Greece's Prime Minister George Papandreou. Photographer: Michele Tantussi/Bloomberg

Greek Prime Minister George Papandreou’s Cabinet is set to endorse additional deficit cuts and asset sales, fending off speculation that the country is headed to a restructuring.

The cost to insure Greek debt against default rose to a record and the yield on its 10-year bonds increased to a euro-era high after Standard & Poor’s said May 20 it may cut Italy’s credit rating. That warning came hours after Fitch Ratings cut Greece three grades.

“Greece risks a sovereign default and finance ministers have expressed strong doubts about the sluggish progress,” French Finance Minister Christine Lagarde said in a May 20 interview with Austria’s Der Standard.

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. Hours before the S&P warning about Italy, Fitch Ratings cut Greece three levels and said it would consider an extension of maturities as a default.

“In isolation this is not a major event, and under normal circumstances I would not expect it to have a significant impact upon the market,” Gary Jenkins, head of fixed-income at Evolution Securities Ltd. in London, said about S&P’s warning on Italy. “However, these are not normal times.”

The euro touched a record low against the Swiss franc today and fell to the lowest in a week against the dollar as concern over Europe’s sovereign-debt crisis deepened. The euro slipped to 1.2349 francs before trading at 1.2394 as of 7:45 a.m. in London from 1.2425 last week. Europe’s shared currency dropped to $1.4050 from $1.4161 on May 20.

Greek Yields

Greek 10-year yields jumped 19 basis points to 16.76 percent as of 9:23 a.m. in London while yields on two-year notes climbed 12 basis points to 25.58 percent. Italian 10-year yields rose six basis points to 4.84 percent.

The cost of insuring government and corporate debt rose in Europe, according to traders of credit-default swaps. Contracts on Greece soared 29 basis points to a record 1,373, Ireland jumped 14 to 655 and Portugal rose 9 to 649, while Italy increased 14 to 174 and Spain climbed 13 to 275, prices from data provider CMA showed today.

In Athens, Papandreou is chairing a Cabinet meeting today to discuss his fifth austerity package since getting a 110 billion-euro rescue from the European Union and the International Monetary Fund.

Asset Sales

The government is looking for ways to speed up plans to sell 50 billion euros of assets, the equivalent of almost 25 percent of gross domestic product. The meeting comes as a team of IMF and EU inspectors prepare to return to Athens this week to complete their review of Greece’s progress in meeting the bailout terms.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, endorsed an independent privatization agency to help sell off some of the Greek government’s assets, German magazine Spiegel said, citing an interview with Juncker.

Italy had its credit-rating outlook lowered to negative from stable by S&P, which cited the nation’s slowing economic growth and “diminished” prospects for reducing government debt, according to a statement on May 20. S&P affirmed Italy’s A+ long-term rating, the fifth-highest, and its top-ranked A-1+ short-term rating. The rating company last cut the nation’s credit rating in 2006.

“With regard to the economy, the government has initiated and will intensify its reforms; with regard to the budget, a phase of measures are in advanced preparation in order to balance the budget by 2014,” the Treasury said May 21 in an e-mailed statement from Rome. It also said the measures will be submitted to the Parliament for approval by July.


Italy’s budget deficit was 4.6 percent of GDP last year, lower than that of France and less than half of Greece’s shortfall. Its debt reached almost 120 percent of GDP, twice the European Union limit, and fallout from the region’s sovereign crisis is making it more costly to finance new borrowing. The extra yield that investors demand to hold Italian 10-year bonds over German bunds rose 13 basis points to 185, the highest in more than four months.

Italian economic growth was 0.1 percent in the first quarter, less than economists had forecast, as gains in exports failed to offset weak domestic demand. GDP in the euro region’s third-biggest economy won’t return to its pre-recession level for at least another two years, and the nation needs to raise productivity, the Organization for Economic Cooperation and Development said in a report this month.

Future Developments

“Rating agencies don’t just look at what’s going on today, they also look at possible future developments, that’s the issue here,” said Nicola Borri, who teaches economics at Rome’s Luiss University. “How will Italy keep its commitments with no growth? Structural reforms are needed but no government, left or right, in the past 10 years has managed to undertake them. This is what S&P is worried about.”

S&P also warned that the “increased fragility” of Prime Minister Silvio Berlusconi’s ruling coalition could undermine implementation of fiscal measures needed to trim the debt. Berlusconi has been weakened by defections of key allies and corruption allegations, and a setback in regional elections this month is further straining the unity of his government.

The Italian Treasury “absolutely” ruled out the risk of political gridlock and said Italy will keep all its economic commitments. It also pointed out in an e-mailed statement that S&P’s views are very different from those expressed by the IMF, the OECD and the European Commission.

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