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Greece’s financial headache turns to migraine

Greece faces the very real prospect that it will need a bailout designed to prevent the country from defaulting — but markets are on edge as officials work out the details.
/ Source: The Associated Press

Greece faces the very real prospect that it will need a bailout designed to prevent the country from defaulting — but markets are on edge as officials work out details on how a rescue would be carried out.

Greece's finance minister said Friday that key aspects of a previously agreed but vague rescue plan by eurozone countries and the International Monetary Fund are being hammered out, even as he insisted no bailout was needed.

A rescue, which some think could come within days, would be an admission by the European Union that the rules set up to safeguard its 11-year-old euro currency haven't been strong enough to weather a crisis.

But prospects of a default could be worse, since it would damage Greece's ability to borrow for years and hit European banks holding Greek bonds with new losses.

The interest rate gap, or spread, between Greek 10-year government bonds and the German equivalent, considered a benchmark of stability, narrowed to below 4 percentage points, after spiraling to 4.8 percentage points Thursday, the highest since Greece joined the euro. The higher the spread, the lower market confidence in Greece's ability to pay.

Those interest rates, even at Friday afternoon's slightly lower levels, still translate to a cost of borrowing of about twice that of Germany's — costs that Athens has said it cannot afford for long. While the government says it has covered all its borrowing needs for April, it needs to raise about €11 billion in May.

Jane Foley, research director at, said the current yields "are still likely to prove unpalatable for the Greek Debt Office."

"Given the Greek government's need to issue €11.6 billion in May and €32 billion through the rest of the year rumors are circulating that the Greek government may be forced to turn to the EU and the IMF for support as soon as this weekend," she said.

Greece took another blow when rating's agency Fitch Ratings cut its debt to BBB-, the lowest investment-grade rating and one notch above so-called junk, or speculative, status.

No rescue needed?
Both Athens and European officials insist no rescue is needed yet and that Greece will not default.

"We have said that Greece does not intend to make use of the mechanism but it is very important for our country for this safety net to exist," Finance Minister George Papaconstantinou said.

Statements a day earlier from European Central Bank president Jean-Claude Trichet that default was "not an issue" for Greece appear to have calmed markets somewhat. The focus turned from the prospect of default — not being able to pay off its debts — to the likelihood of some kind of rescue under promises extended by other eurozone governments March 25.

Athens had hoped that the mere existence of the plan, which would provide Greece with loans from other eurozone governments and the International Monetary Fund, would calm the markets and lead to a drop in borrowing costs.

But given its lack of clarity so far, the plan has done little to assuage international concerns, meaning market reactions to Greece have been extremely volatile. While France and Italy offered support, the key question is Germany, where Chancellor Angela Merkel has been a chief opponent of bailing out Greece.

At her insistence, the loans also need unanimous approval of all 16 euro-zone members and Greece would not get a break on interest rates. That last provision on loan interest rates is a key part now under discussion.

European officials have been working on the details of the bailout loans for Greece and say they could calculate rates below what markets are currently charging for Greek bonds, without giving Greece a free ride. Trichet and Germany's powerful constitutional court fiercely oppose loans so cheap that they are a form of subsidy.

Bailout plans
Finance ministers from the 16 nations that use the euro meet next Friday when they could pick up work by junior officials and decide how a bailout — which some officials have reckoned at €20 billion — would work. However, officials say the definite price for Greek loans will only be agreed after Greece makes a request for help.

In Paris, French President Nicolas Sarkozy the plan was in place and "we are ready to activate it at any time" if asked.

Fitch, in its downgrade of Greece, took a swipe at the eurozone for not giving details about the bailout plan.

"The lack of clarity regarding the mechanism for timely external financial support may have hindered Greece's access to market finance at affordable cost and hence further undermined confidence in the capacity of the government to meet its fiscal targets," it said.

The issue of at what point borrowing costs become prohibitive for Athens has been central to the questions of when Greece might seek help from the rescue plan.

German Finance Ministry spokesman Michael Offer said there was no specific figure that could be pinned down.

"I don't think that's the right approach, because you can't define like that a borderline interest rate above which there is an emergency," he said in Berlin.

Greece has been spending beyond its means for years, leaving it with a massive budget deficit of 12.9 percent of economic output. Revelations late last year that the country's previous government had been fudging statistics sent shock-waves across Europe, hammered the euro and led international markets to loose confidence in the Mediterranean country — which in turn translated into ever higher borrowing costs.

Athens has pledged to reduce its deficit to 8.7 percent this year, and has pushed through a harsh €4.8 billion ($6.5 billion) austerity program cutting public sector wages, freezing pensions and hiking taxes.