Greek economic prospects darkened as European bickering risked delaying the next rescue payment and defections weakened Prime Minister George Papandreou’s majority.
An emergency session of euro finance chiefs in Brussels yesterday failed to break a deadlock on how to enroll investors in a second bailout without triggering a default, casting doubt on funds due from the International Monetary Fund next month.
In Athens, Greek police used tear gas to disperse demonstrators around the Parliament as 20,000 people rallied against wage reductions and tax increases as lawmakers debated the budget cuts and asset sales that are conditions of the aid. Ports, banks, hospitals and state-run companies were paralyzed by strikes, while a Papandreou ally said he won’t support the austerity measures and another bolted his Socialist Party.
Debt restructuring “seems to be increasingly probable,” Raghuram Rajan, a professor at the University of Chicago and a former chief economist at the IMF, said today in Singapore. “The political will required to do what would be necessary to service the level of debt that is building up is reaching the limits of what Greece can do.”
The euro weakened 1 percent to $1.4290 at 2:50 p.m. in London. The cost to insure Greek debt climbed to a record, indicating an about 75 percent chance of default within five years.
Yields on 10-year Greek bonds jumped to 17.9 percent, the highest in the 17-nation euro area’s history. The slump pushed the extra yield that investors demand to hold Greek 10-year bonds instead of similar maturity German bunds to a record 1,491 basis points.
Papandreou briefed President Karolos Papoulias in Athens today, telling him, “we will proceed with imperative decisions.” German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in two days in Berlin to resolve their differences.
Pressure to craft a rescue plan and avoid the first euro-area default intensified after Standard & Poor’s slapped Greece with the world’s lowest credit rating on June 13 and the European Central Bank and Germany clashed over easing Greece’s debt load. At 143 percent of gross domestic product, it’s the highest in Europe.
Shares of BNP Paribas SA, Societe Generale SA and Credit Agricole SA, France’s three biggest banks, dropped more than 2 percent after Moody’s Investors Service placed their credit ratings on review to scrutinize their holdings of Greek debt.
With consensus elusive before the target date of a European Union leaders’ summit late next week, finance ministers agreed to convene again on June 19, adding a round to a gathering scheduled for June 20. Talks may drag on into July, Luxembourg’s Finance Minister Luc Frieden said yesterday.
“There’s no plan B, we have to come up with a solution,” said Gilles Moec, co-chief European economist at Deutsche Bank AG. “They’ll find a way to make it safe, which is what the ECB and the French want, and make it irrevocable and grant more time, which is what Germany wants.”
Europe’s financial leaders must hammer out a revised Greek package to persuade the IMF to pay its share of the 12 billion-euro ($17.3 billion) tranche originally due in June. The IMF had indicated that it would withhold its 3.3 billion-euro piece unless the EU comes up with a plan to close Greece’s funding gap for 2012. A June 3 statement said the full payment would be made in early July, presuming a deal is reached.
“We have to proceed very cautiously,” Frieden told reporters after yesterday’s emergency session. “Very clearly we have to go in the direction” of a delay until next month. “Several options -- from the IMF, as well as from the European Central Bank and from the European Commission -- still have to be studied.”
Thirteen months after Greece was granted a 110 billion-euro bailout that failed to halt the spread of the debt crisis to Ireland and Portugal, politicians are at odds over fulfilling a pledge to make creditors pick up some of the cost of a second rescue.
ECB policy makers have warned against German proposals that maturities on Greek debt be extended for seven years, an outcome rating companies have said would be considered a default. ECB President Jean-Claude Trichet, who attended yesterday’s meeting in Brussels, said on June 9 that governments were flirting with what could be a “enormous mistake.”
“It’s easy to understand everybody’s position but that doesn’t mean the positions are compatible,” Laurence Mutkin, head of European fixed-income strategy at Morgan Stanley in London, told Bloomberg Television today. Still, “there’s enough room for a meeting of the minds,” he said.
Germany and France, Europe’s two biggest economies, are on opposite sides of the dispute, with France indicating backing for the ECB’s view. While French Finance Minister Christine Lagarde has ruled out any action that constitutes a “credit event,” her German counterpart, Wolfgang Schaeuble, said June 10 that Europe’s biggest economy “has to insist on the participation of the private sector” in Greece.
Schaeuble said yesterday’s meeting produced “no result.”
Germany is likely to back down, said Andrew Bosomworth, a fund manager at Pacific Investment Management Co., who sees “little leeway for a middle-ground solution.”
“Germany probably is going to come down, to back off,” Bosomworth said in an interview on Bloomberg Television today. “I think it’s going to be a resolution in the form of a very forceful Vienna II agreement, whereby the private sector will voluntarily commit to roll their debt with a lot of encouragement from their government.”
In Greece, the third general strike this year underscored the pressure on Papandreou, who aims to get 78 billion euros of cuts and asset sales passed by the end of the month. His Socialist Pasok party held a six-seat edge in the 300-member legislature before the latest defections.
“This government has the responsibility to save the country from default,” spokesman George Petalotis told reporters in Athens yesterday in response to questions on the strikes.
Demonstrators have gathered in the central square of Athens in front of parliament for 21 days, setting up tents and calling on others to join them. Police said the largest rally was on June 5, when 50,000 people gathered in front of the chamber.