EU, IMF Wind Up Greek Economy Review as Bailout Readied

(My remarks at the end of the article)

By Maria Petrakis and Marcus Bensasson - Jun 3, 2011 12:02 PM GMT+0300 inShare

European Union and International Monetary Fund officials today complete a review of Greece’s plan for 78 billion euros ($113 billion) in asset sales and austerity measures as they prepare the nation’s second bailout in little more than a year.

The assessment caps a week when Greece’s fiscal crisis worsened enough for Moody’s Investors Service to raise the probability of a default to 50 percent. Greek Prime Minister George Papandreou will discuss the findings at 3 p.m. on a visit to his Luxembourg counterpart, Jean-Claude Juncker, who leads the group of euro-area finance ministers.

“The medium-term plan is largely completed and some technical details remain,” George Petalotis, Papandreou’s spokesman, said yesterday. “There were no major hiccups.”

The lifeline may incorporate a role for bondholders as European leaders try again to prevent the euro area’s first sovereign default. Their May 2010 rescue failed to stem an investor exodus from Greece and the Greek government now faces a funding gap of 30 billion euros next year with 10-year borrowing cost above 16 percent, Europe’s highest debt load and the economy in a three-year slump.

Papandreou is promising 6.4 billion euros of spending cuts this year, another 22 billion euros up to 2015, and 50 billion euros in sales of assets including Hellenic Telecommunications Organization SA (HTO) and Public Power Corp SA. The pledges are key to securing a fifth payment of loans under last year’s 110 billion- euro EU-led rescue as well as more financing over the next two years as borrowing costs lock Greece out of markets.

Moody’s Downgrade

Moody’s downgraded Greece to Caa1, on a par with Cuba, and raised the nation’s risk of default on June 1 after policy makers considered asking investors to reinvest in new Greek debt when existing bonds mature. The move prompted Greek 10-year bonds to fall to the lowest since January.

Greece’s two-year note yields headed for their biggest decline in 11 weeks, falling below 24 percent for the first time since April. Ten-year bonds rose, pushing the yield down four basis points to 16.21 percent.

The yield difference, or spread, between 10-year German bunds and Greek securities of a similar maturity narrowed five basis points to 1,320 basis points.

“The general perception is that Greece will head to some form of restructuring, and eventually the ratings will probably move to D,” said Brian Barry, an analyst at Evolution Securities Ltd. in London. “For a sovereign rating to fall from about A to this level is new territory.”

Greek Banks Cut

Moody’s today cut the ratings on eight Greek banks, including the nation’s largest, National Bank of Greece SA. (ETE)

Juncker said yesterday European authorities want a final decision on a Greek aid package by the end of the month.

“My personal feeling and knowledge is that Greece will have a new program submitted under strong conditionality,” Juncker told reporters in Aachen, Germany. He said the report by the “troika” of officials from the EU, IMF and European Central Bank should be issued in the coming days.

The troika has been reviewing Greece’s progress in meeting the terms of the bailout since May 11. The conclusions will be considered when EU finance ministers meet, which may be as early as next week.

Europe’s financial leaders need to hammer out a revised Greek package by the end of June, in time to persuade the IMF to pay out its share of the next tranche of loans and before a summit of EU leaders on June 23-24. The IMF had indicated that it would withhold its share of the June payment unless the EU comes up with a plan to close Greece’s funding gap for 2012.

IMF Role

The Washington-based lender provided 30 billion euros of Greece’s original loans, along with a third of the loans since granted to Ireland and Portugal as the spreading crisis threatened the integrity of the euro.

Policy makers have in recent days narrowed in on bond rollovers as a pillar of any new aid package. The step would be favored by the ECB, according to two officials familiar with the situation, because it would skirt the risk of any agreement being classified as a default. Investors may be given preferred status, higher coupon payments or collateral, said two other EU officials familiar with the situation.

About 55 percent of investors in Greek government bonds would likely roll over holdings of securities maturing through 2013 to help the nation manage its budget deficit, according to ING Groep NV.

Rollovers

“If there was a 100 percent take-up of this idea, Greece would save 15 billion euros in 2011, 33 billion in 2012 and 29 billion in 2013, which would more than cover the gap being left by not getting back to capital markets,” Padhraic Garvey, head of developed-market debt in Amsterdam, wrote in an e-mailed note today. “In reality the voluntary take-up would likely be dominated by bank hold-to-maturity portfolios, Greek domestics and the European Central Bank, which would mean a more likely voluntary take-up of about 55 percent.”

Greece’s debt is likely to mushroom to 157.7 percent of gross domestic product in 2011, the highest in euro history, the European Commission said May 13. It predicted a 3.5 percent economic contraction, shedding doubts on whether Greece will generate the tax revenue to pay off its debts.

My remarks.

1. restructuring or rollover is a prerequisite not a guarantee.
2. Public Power Corp. SA is a privatization landmark. Its appoint of no return.
3. I expect, at worse a  30% debt reduction, about 50.000 layoffs from public sector.
4. No best scenario is to be expected for now.