Germany Warns on Greek Debt, Defying Efforts to Snuff Out Crisis

Germany warned that deficit-scarred Greece might need more financial relief, reviving European debt concerns just as Portugal seeks an 80 billion-euro ($116 billion) aid package.
German Finance Minister Wolfgang Schaeuble said it is unclear whether Greece, the root of the year-old debt crisis, will need another cut in its bailout rate or a further extension of repayment terms to return to fiscal health. “We, also the Greek government and the Greek colleague, can’t say for good today whether that’s enough,” Schaeuble told reporters after an April 9 meeting of European finance officials in Godollo, Hungary.

“Whether that is enough and how this continues will have to be monitored closely.” Germany’s doubts conflicted with official assertions that Greece is on the right track, defying efforts to put an end to the crisis that threatened the survival of the euro, postwar Europe’s signature economic achievement. Last week’s increase in European Central Bank interest rates for the first time in almost three years throws a further cloud over weaker economies. Bond investors are charging Greece 938 basis points more than Germany to borrow for 10 years. The spread for Ireland, the second country to obtain aid, is 577 basis points.

 Portugal, aiming for a relief plan by mid-May, pays an extra 518 basis points. Officials including ECB President Jean-Claude Trichet dismissed suggestions that Greece might not be able to repay its debt, saying budget cuts, tax increases and 50 billion euros in asset sales will bandage its economy. ‘Solid Plan’ “We do exclude restructuring,” European Union Economic and Monetary Commissioner Olli Rehn said. “We have a solid plan. It is based on a very careful analysis of debt sustainability.” The Greek government predicts that the clampdown on spending will shrink the economy by 3 percent in 2011, the third straight contraction. EU forecasts show debt peaking at 159.4 percent of gross domestic product in 2012, the year Greece is supposed to return to the markets for financing.

Greece might need more time to pay back debts to bondholders, in a “rescheduling” that would not be classified as a default, Organization for Economic Cooperation and Development Secretary-General Angel Gurria said. “The adjustment program of a country like Greece is a very painful program, and if a rescheduling of the payments is something which is required in order to make those difficult policies work, then that is what should be done,” Gurria told Bloomberg Television.

Lower Greek Rates Euro-area ministers confirmed plans to loosen Greece’s economic noose, lengthening the maturities on its 110 billion- euro aid package to 7 1/2 years from 3 years and cutting the average lending rate by 1 percentage point to around 3.5 percent. “For Greece to put its fiscal problems behind it, and to create a positive environment for growth, it still needs to do a lot of hard work,” David Mackie, chief European economist at JPMorgan Chase & Co. in London, said in a research note.

Ireland has made less progress in winning a cut in the 5.8 percent rate on its 67.5 billion euros in loans, facing pressure from Germany and France to first lift its 12.5 percent corporate tax rate, about half the EU average. “There’s no question of any concession on the corporate tax rate being made by Ireland,” Irish Finance Minister Michael Noonan said. “We’ll explore alternatives.” Portuguese Politics Portugal’s aid negotiations, set to start tomorrow, collide with a campaign for early elections that were triggered after the opposition on March 23 balked at proposals for additional savings of 4.5 percent of GDP over three years.

 “Discussing deeply unpopular measures ahead of elections will not be easy,” Gilles Moec, a London-based economist at Deutsche Bank AG, said in a research note. “Some volatile newsflow is likely to emerge in the next few days from Lisbon.” In addition to budget cuts and the sale of state assets, Portugal will be pressed to lessen regulations that have helped keep its annual economic growth rate below 1 percent for the past decade, one of Europe’s worst records. The EU set a mid-May deadline to arrange a three-year lending program. Rehn called the 80-billion-euro aid estimate “very, very preliminary.

” As with the first two bailouts, two-thirds of the loans would come from the EU and one-third from the International Monetary Fund. The Washington-based global lender is “prepared to move expeditiously,” Managing Director Dominique Strauss- Kahn said on April 8. The Bill “I never write a check before I see the bill,” French Finance Minister Christine Lagarde said. “Work has to be done quickly.” Politics in the bill-paying countries will also play a role, with German Chancellor Angela Merkel’s popularity suffering and polls showing a surge in support for a euro-skeptic party in Finland’s April 17 elections. Finnish Finance Minister Jyrki Katainen, a candidate for prime minister, said Portugal must enact deficit cuts that go beyond the measures rejected last month in parliament. “The package must be really strict because otherwise it doesn’t make any sense,” Katainen said in Godollo.

 “The package must be harder and more comprehensive than the one the parliament voted against.” Finance chiefs sent a more positive message on Spain, praising its austerity measures and cleanup of savings bank debt. In a sign of confidence in Spain’s financial management, Spain’s bond spread has been compressed to 178 basis points from 283 basis points on Nov. 30. “I do not see any risk of contagion,” Spanish Finance Minister Elena Salgado said. “We are totally out of this.”

bloomberg.com