Thursday, March 25, 2010

Merkel Sets Greek Terms

Merkel Sets Greek Terms, Calls IMF-EU Aid Last Resort (Update1)

By James G. Neuger

March 25 (Bloomberg) -- German Chancellor Angela Merkel laid out her terms for an aid package for debt-laden Greece, saying she supports loans from the International Monetary Fund and European governments as a last resort if default looms.

Asserting her clout as head of the European Union’s largest economy, Merkel ruled out an aid decision at today’s EU summit in Brussels, pushed for the IMF to be part of any potential rescue, and called for measures to stop deficit “trickery.”

“A good European is not necessarily one who rushes to assist,” Merkel told German lawmakers in Berlin today. “A good European is one who abides by the European treaties and national law and thus sees to it that the euro zone’s stability isn’t harmed. That’s our guidance for all decisions today and tomorrow, and also for the future.”

Squabbling over Greece and concern that fiscal woes will engulf Portugal, which was stung by a debt downgrade by Fitch Ratings yesterday, sent the euro to a 10-month low against the dollar and its weakest ever against the Swiss franc. The euro steadied today, gaining 0.4 percent at $1.3365 at 11:25 a.m. in London.

The summit begins at 5 p.m., though at the last meeting on Feb. 11 a political declaration to back up Greece was made before the official start.

Trichet’s Reversal

European Central Bank President Jean-Claude Trichet took some pressure off Greece today by extending emergency lending rules, saying its bonds won’t be cut off from ECB refinancing operations next year in case Moody’s Investors Service lowers its rating to a level comparable with other companies.

Trichet’s remarks marked a reversal for the ECB, which said in January that it wouldn’t soften its collateral policy for the sake of a single country. The bank was scheduled to reintroduce pre-crisis rules at the end of 2010.

Greek bonds gained, sending the 10-year yield down 2 basis points to 6.34 percent, 322 basis points above comparable German debt. That extra borrowing cost has risen from 273 basis points on Feb. 11 when the EU vowed “determined and coordinated action” to stanch the crisis.

“We will move ahead whatever decisions are taken,” Greek Prime Minister George Papandreou told reporters today in Brussels. “Greece is determined to deal with its own problems,” he said, adding that “we are on the right track.”

Maturing Debt

Greece, which needs to sell about 10 billion euros ($13 billion) of bonds in coming weeks, may need to turn to the IMF in the absence of European aid, Papandreou said on March 19. About 8.2 billion euros of debt matures April 20 and 8.5 billion euros on May 19, with about 3.9 billion euros of bills maturing in April and May.

Goldman Sachs Group Inc. estimates that Greece may ultimately get aid from the IMF worth about 20 billion euros over 18 months, according to an e-mailed note today.

The Greek government is counting on wage cuts and tax increases to shave the deficit to 8.7 percent of gross domestic product this year from 12.7 percent in 2009, the highest in the euro’s 11-year history.

While the euro’s German-designed “stability pact” foresees financial penalties for countries that go over the limits, no country has been sanctioned since the currency debuted in 1999. The budget deficits of all 16 euro nations are forecast to exceed the EU’s limit of 3 percent of GDP this year after the worst recession since at least World War II.

‘Extraordinary Responsibility’

Europe has to “put a stop to trickery,” Merkel said. “As German chancellor, I’m aware of my extraordinary responsibility in this hour, because the German people placed its faith in a stable euro when it gave up the deutsche mark. This trust -- and the German government is united on this point -- must not be betrayed under any circumstances.”

Merkel has left open the possibility of pushing wayward countries out of the euro and sought a rewrite of European treaties to impose more fiscal rectitude. All 27 EU countries would have to back such an overhaul. The EU’s latest treaty, in force since December, took eight years to negotiate and ratify.

Poul Nyrup Rasmussen, a former Danish premier and leader of the Party of European Socialists, said Germany’s proposal for a last-resort Greek aid package of loans from the IMF and EU was a “poor solution.”

“If the only answer from Europe is to ask the IMF to help us, then we are really, really, really poor,” Rasmussen, whose group includes Papandreou, told reporters in Brussels. “It’s a poor solution for Europe that we cannot manage on our own.”

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