Talks on Greek Bailout Are Stalled

The Wall Street Journal

IMF, Commission and Central Bank Clash With Athens on Budget-Gap Fix

By ALKMAN GRANITSAS, STELIOS BOURAS and COSTAS PARIS

ATHENS—Talks over new bailout funds for Greece were suspended Friday amid disagreements over how to fill a government-deficit gap that once again is veering off track, raising doubts about the country's future access to finance and triggering renewed nervousness in financial markets across Europe.

The suspension pushed yields on Greek government debt to levels indicating that investors see a default by Athens soon as a near certainty: Interest rates on one-year paper blew out past 70% and two-year yields rose close to 50%.

More disturbingly for euro-zone governments—given Greek bonds are barely traded and wild swings in yields are therefore likely—financial markets also pushed up borrowing costs for Italy, reflecting anxieties about Italian austerity measures being watered down, and for Spain.

The continent's stock markets also retreated, with the French market down 3.6% and the German market down 3.4%.

The suspension of the talks in Athens between the government and a group of officials representing the providers of Greece's bailout cash came, officials said, amid a dispute about how to address new gaps opening up in the government budget deficit.

"The Greek side insisted the missed targets are the result of the recession. The troika said recession played a part, but Greece basically didn't keep up with its commitments, so more measures will be needed to make up for the lost ground," said a person with direct knowledge of the talks.

"There is a clear disagreement that can't be bridged today," the person added.

The talks with the so-called troika—representatives of the International Monetary Fund, European Central Bank and European Commission—began earlier this week and were expected to be concluded by Sept. 5. According to a Greek government official, the delegation is now expected to return in about 10 days, after the government has prepared a draft of its 2012 budget.

On the talks hangs a payout of €8 billion ($11.5 billion) of rescue funds under the €110 billion package arranged last year, needed to ensure the government pays its way.

Greece has negotiated a further official rescue package of more than €100 billion, meant to tide it through 2014, which has yet to be formally agreed by lenders.

"I expect a hard default definitely before March, maybe this year, and it could come with this program review," said a senior IMF economist who is keeping close tabs on the situation. "The chances for a second program are slim."

Failure of Greece to meet its targets, growing reluctance by some euro members to continue lending and the fact that private-sector participation in a second bailout won't significantly alter Greece's debt profile are the primary factors, the IMF official said.

Besides projected fiscal deficits widening far beyond the IMF/EU program allows, Greece has failed to reach its targets on raising revenue through privatization of state assets, and even neglected to achieve simple bureaucratic requirements, according to people familiar with the matter.

Finance Minister Evangelos Venizelos told a news conference on Friday that the talks hadn't broken down. But he said Greece must avoid taking further measures that would worsen the country's deepening recession, putting his position at odds with that of the troika.

Government officials say there are differences over new forecasts for the size of the budget deficit.

The government expects this year's deficit to be about 8.1% to 8.3% of gross domestic product, compared with the official 7.6% target—although it hasn't ruled out a greater deterioration.

The troika, however, is expecting the deficit to reach 8.8% this year, and is seeking additional government spending cuts this year and next to meet the targets.

Mr. Venizelos on Friday repeated his position that no further measures will be necessary if an austerity program passed by the Greek Parliament following violent public protests in June are fully implemented.

 "What is important for us is to restrain the recession, not to overstep and make things worse," he told reporters.

The Greek government is worried about a debt trap. It believes it is missing its budget-deficit targets mainly because the economy is weaker than expected.

Mr. Venizelos said the Greek economy will shrink by 5% this year, against a previously forecast 3.9% contraction. More spending cuts, the government fears, will weaken the economy further and thereby increase the burden of paying off debt.

Write to Alkman Granitsas at alkman.granitsas@dowjones.com and Costas Paris atcostas.paris@dowjones.com