Beware Greeks Selling Gifts as EU Frets: Euro Credit

By Nikos Chrysoloras and Marcus Bensasson  Mar 10, 2014 1:35 PM GMT+0200

Bloomberg

The European Commission, the European Central Bank and the International Monetary Fund have expressed a view that the Greek government may repeat past mistakes if it manages to slip the shackles of its bailout program

Greece’s plan to return to debt markets this year is meeting opposition from its bailout creditors, who are concerned it may allow the government to ease off on efforts to fix the economy.

The European Commission, the European Central Bank and the International Monetary Fund have expressed a view that the Greek government may repeat past mistakes if it manages to slip the shackles of its bailout program, said two officials, one from Greece and another from the European Union. They asked not to be named because the discussions are private.

Greece surrendered control of its economic and budget policy to the so-called troika when it was forced to seek emergency funding in 2010 as its finances spiraled out of control. With the ECB’s government-debt assurances fueling a rally across euro area sovereigns, Prime Minister Antonis Samaras says he intends to tap markets again, marking the end of the Greek bailout which triggered the European debt crisis.

“The troika is realizing now that when Greece had a 10 percent deficit and they had all the negotiating power, they were too focused on austerity instead of structural reforms,” said Michael Michaelides, a rates strategist at Royal Bank of Scotland Group Plc in London. “A market return would mean that some of the tougher reforms would never be enacted.”

Troika Leverage

The yield on Greece’s 10-year bond is back where it was before the debt crisis erupted, touching 6.65 percent last week, its lowest level in almost four years. The debt yielded 6.81 percent at 1:16 p.m. today local time, compared with a record 37.1 percent in March 2012.

“Greek bond yields are coming down very nicely,” said Holger Schmieding, chief economist at Berenberg Bank in London. “A two to five-year placement should not be much of a problem at a yield acceptable to Greece if nothing bad happens such as the breakup of the government coalition.”

The troika’s leverage over Samaras is already weakening. With the economy set to emerge from a six-year recession and the current account and primary budget in surplus, the premier has enough cash to pay public wages and pensions. He only needs to borrow to meet repayments on the nation’s 321 billion euros ($445 billion) of debt.

Protection From Default

What’s more, most of this debt is held by its euro area partners, the IMF and the ECB. So even if the troika could make Greece the first nation to default on payments to its own central bank, by continuing to withhold a long-delayed tranche from the bailout facility, both financial markets and the 11 million Greeks have some protection from the fallout.

Greece doesn’t expect to win an agreement on the next tranche from euro region finance ministers who are meeting in Brussels today, a Greek Finance Ministry official said in a March 8 phone interview. The Greek government hopes the troika will have completed its review of their progress by March 16, the official said. The quarterly review has now lasted more than six months.

“Talks are progressing and the atmosphere is constructive,” Simon O’Connor, the European Commission’s spokesman for economic affairs said by e-mail March 8. “Of course, there are no guarantees as to when exactly we will reach an agreement.”

Greece’s Failures

Troika officials are concerned that as they lose leverage over the Greek government the country will slip back into the errors which sparked the European debt crisis, the officials from Greece and the EU said. In that scenario, euro member states may refuse another bailout, they said.

The only way to ensure Greece pushes through the changes needed to fix its economy is with a new loan, attached to strict conditions of fiscal prudence, the European official said. He cited Greece’s failure to enact all the agreed public and tax administration changes, as well as the country’s reluctance to comply with measures prescribed to free up the markets for goods and services, as examples of the government’s approach.

The government expects the EU statistics agency in April to verify that the country posted a 2013 budget surplus before interest costs, which under a November 2012 agreement between the currency bloc’s finance ministers will qualify Greece for additional debt relief measures, further easing the financial pressure on Samaras.

Lower Interest

Interest payments on loans have already decreased from 7.8 percent of Greek gross domestic product in 2011, to 3.3 percent of GDP in 2013, Deputy Finance Minister Christos Staikouras said earlier this month, referring to successive rounds of interest rate cuts and extensions of maturities for the bailout funds. The average maturity of Greek government debt is now 17 years and the country pays about 2 percent in interest on its bailout loans, Staikouras said.

Investors searching for returns with interest rates at record lows have fueled a rally in Greek government bonds, which have outperformed any other sovereign security tracked by Bloomberg this year.

“Ideally, we would like to have no new loans from our European partners,” Stournaras said on Jan. 9.

To contact the reporters on this story: Nikos Chrysoloras in Athens at nchrysoloras@bloomberg.net; Marcus Bensasson in Athens at mbensasson@bloomberg.net

To contact the editors responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net Ben Sills, Nikos Chrysoloras