European finance ministers pushed bondholders to provide greater debt relief for Greece, denting newfound confidence in Europe’s strategy for coping with the two-year-old debt crisis.
Euro governments sought to fill a deeper-than-expected hole in Greece’s finances by saddling investors with a lower interest rate on exchanged bonds, setting up a confrontation in the runup to a Jan. 30 European Union summit. Cash-strapped Greece needs the accord to enable it to make a 14.5 billion-euro ($18.9 billion) bond payment on March 20.
Brinkmanship over Greece clouded progress toward new fiscal rules and a beefed-up rescue fund, posing a potential setback to the start-of-year rally in stocks, bonds and the euro.
“The current state of the negotiations with the private creditors is that we’re a bit short of where we want to be,” German Finance Minister Wolfgang Schaeuble told reporters after EU finance officials met in Brussels today. “As long as we don’t have debt sustainability, there won’t be a new program.”
The euro slipped 0.3 percent at $1.2973 at 3:20 p.m. in Brussels. The Stoxx Europe 600 index was down 0.9 percent.
Efforts to shore up Greece, which triggered the crisis, were flanked by headway on a German-inspired deficit-reduction treaty and indications that a cap on rescue lending might be boosted to 750 billion euros from 500 billion euros.
Finance chiefs refused to increase an offer of 130 billion euros in public funds for a second Greek program. Instead, they rebuffed investors’ bid for an average 4 percent interest rate on new Greek bonds, seeking coupons below 3.5 percent for debt to be serviced until 2020 and below 4 percent over the 30 years of the next Greek package.
The extra cost to bondholders would be 10 billion euros or 20 billion euros -- a sum too small to jeopardize a deal, said Carsten Brzeski, an economist at ING Group in Brussels.
“This is just nothing compared to the psychological impact you would get on Spanish or Italian yields if Greece were to go bust,” Brzeski said in a Bloomberg Television interview. “They’re going to find a deal.”
The stalemate is reminiscent of October’s bargaining over bond losses that culminated in a late-night confrontation between leaders including German Chancellor Angela Merkel and the banks’ chief negotiator, Charles Dallara, managing director of the Washington-based Institute of International Finance.
Speaking to reporters in Zurich today, Dallara said there is “no use in ratcheting up tensions” in the media. He said the banks’ offer was consistent with the October pledge to pursue a 50 percent reduction in the face value of Greek debt.
Hedge funds holding Greek bonds may resist the deal, seeking greater profit by getting paid in full, either by the Greek government or by triggering payouts from insurance contracts known as credit-default swaps. Vega Asset Management LLC resigned from the committee of creditors negotiating the swap last month because the hedge fund refused to accept a net-present-value loss exceeding 50 percent, according to a Dec. 7 e-mail sent to other panel members and obtained by Bloomberg News.
Calling himself a “good negotiator,” Germany’s Schaeuble said the banks were bargaining “like in a bazaar, the last offer -- this sort of thing doesn’t impress me.”
Greece’s feuding political factions faced pressure as well. In a replay of the bickering that delayed the payout of Greece’s last loan installment, the EU insisted that all political parties commit to enacting austerity measures, regardless of who wins the next Greek election.
“We need convincing and firm commitments from all the leaders of the political forces” as a “necessary precondition” for a second aid program, EU Economic and Monetary Commissioner Olli Rehn said.
Failure to wrap up the debt-reduction accord helped drive Greek two-year yields to an all-time high of 206 percent yesterday. In contrast to earlier episodes in the crisis, investors were optimistic that Greece’s travails won’t spill over to the rest of Europe.
Successful short-term debt sales in the past two weeks in Italy, Portugal, Spain, France and Belgium were smoothed by 489 billion euros disbursed by the European Central Bank in unlimited three-year loans to euro-region banks. Spain today sold 2.51 billion euros of bills, just above its maximum target for the sale, as a surge in demand helped bring down three-month borrowing costs to 1.285 percent, the lowest since March.
Finance ministers put what Rehn called the “semifinal touches” on a fiscal treaty designed to turn Europe into a low-debt economy. The treaty may be wrapped up as soon as next week’s leaders’ summit.
The treaty will create an EU-supervised automatic “correction mechanism” that would force governments to fix “significant” deviations from a target structural deficit of 0.5 percent of GDP, according to a Jan. 19 draft obtained by Bloomberg News.
Under German pressure, countries that don’t enact the fiscal pact will be denied aid from the permanent rescue fund, the European Stability Mechanism. Finance ministers agreed to set up the ESM in July, a year ahead of schedule, after reaching a compromise with Finland over how it will award aid.
Finland, one of the four remaining euro-area borrowers rated AAA by Standard & Poor’s, pushed through changes to provisions that could force it to underwrite loans against its will. Finance chiefs will sign the ESM treaty on Feb. 20, sending it to national parliaments for ratification.
Germany, Europe’s dominant economic power, signaled yesterday that it might back an increase in the overall rescue capacity to 750 billion euros during the year starting in July when the temporary fund, the European Financial Stability Facility, runs in parallel with the permanent fund.
Twin Rescue Funds
In the past, Germany has insisted on limiting the combined lending at 500 billion euros. Italy’s prime and finance minister, Mario Monti, called for more, saying: “If the amount is of a dimension that the markets consider credible, it’s very probable that it will never have to be used.”
The IMF repeated its plea for the dual-fund option. Speaking on Germany’s Deutschlandradio today, IMF Managing Director Christine Lagarde said: “The idea behind the wall is that it is so big that investors -- people who finance, people who speculate occasionally -- are discouraged because the wall is too big so that the fire cannot go through. It needs to be improved -- the EFSF plus the ESM.”
The dual use of the funds “is capable of consensus,” Austrian Finance Minister Maria Fekter said today.
Meanwhile, the temporary fund will soon be ready to offer insurance to persuade investors to buy bonds, said Klaus Regling, the fund’s manager. It would only intervene if a country such as Italy or Spain requests the backup.