European Leaders Hammer Out Greece Aid Before Summit Start

By James G. Neuger
Feb. 11 (Bloomberg) -- Greek Prime Minister George Papandreou met his French and German counterparts today as they hammer out what may be a precedent-setting aid package for Greece at a European Union summit in Brussels.
Germany and France set the stage for the meeting by working on options such as loan guarantees as long as Papandreou overcomes street protests and makes deeper cuts to the EU’s biggest budget deficit. The International Monetary Fund may participate in the EU-led plan, German Vice Chancellor Guido Westerwelle said today.
"We will stand by Greece politically, there’s no doubt about that," Westerwelle told reporters in Berlin. "But the German taxpayer can’t offer a blank check for Greece."
Greek bonds extended their rally after the biggest gains since at least 1998 yesterday. The yield on the 10-year security fell 12 basis points to 5.89 percent. That left Greek yields 267 basis points above German levels, the smallest spread since Jan.
19, yet more than double the 108 basis points on Aug. 8, 2009.
The gains raised the risk of a selloff if the 27-nation bloc fails to send a convincing signal of support for Greece after leaders spent weeks denying they would need to rescue the country.
"Markets could try to test such a commitment," said Carsten Brzeski, an economist at ING Group in Brussels.
"Markets would probably be enthusiastic at first glance, but at second glance there might be people trying to check how strong this commitment was."

Snow Delay

The summit, which was delayed because of snow, is scheduled to start at 12 p.m. local time and will also be attended by European Central Bank President Jean-Claude Trichet. The euro, which has weakened 9 percent since the start of December, strengthened today to $1.3759 as of 11:38 a.m. in Brussels from
$1.3737 yesterday.
Called by EU President Herman Van Rompuy to sketch out a 10-year economic strategy, the summit has turned into a crisis- management exercise that will test Europe’s ability to run a common currency with 16 separate national fiscal policies.
For that reason, EU officials have resisted putting Greece in the sole hands of the IMF, concerned that recourse to outside assistance would expose Europe’s inability to get its own house in order.
Investors might view an IMF-led package "as a sign that the European institutions had failed," Ben May, an economist at Capital Economics in London, said in a research note. "This could cast doubt on the long-term future of the euro zone."

Options

Polish Prime Minister Donald Tusk, who country is not in the currency area, said the EU’s options include bilateral assistance and issuing eurobonds "to raise capital for a special aid fund for countries in crisis." The U.K. has indicated it won’t contribute funds to any Greek bailout.
Greece, representing 2.7 percent of the bloc’s $13 trillion economy, posted a budget deficit of 12.7 percent of gross domestic product in 2009, the highest in the euro’s 11-year history and more than four times the EU’s 3 percent limit.
Papandreou’s government needs to sell 53 billion euros ($73
billion) of debt this year, the equivalent of about 20 percent of GDP. Greece’s credit rating was cut by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings in December.
The euro’s slide to a nine-month low of $1.3586 on Feb. 5 forced Greece to the top of the EU agenda out of concern that speculators might take aim at Spain and Portugal, which are also struggling to cut their deficits.

Distance

The EU needed to act to calm exaggerated fears in the markets, a French official told reporters late yesterday.
Spanish Finance Minister Elena Salgado distanced Spain’s fiscal woes from Greece’s, saying "whatever is said today will be very specifically aimed at Greece."
Greece said yesterday that spending cuts started to take hold in January, narrowing the central government’s cash shortfall to 818 million euros in January from 1.3 billion euros a year earlier.
Belt-tightening measures "will be implemented in every detail," Papandreou told reporters in Paris yesterday.
Papandreou met German Chancellor Angela Merkel and French President Nicolas Sarkozy along with Van Rompuy in Brussels before the summit started, a European official said. Rompuy also had a session with European Commission President Jose Barroso, Trichet and Spanish Prime Minister Jose Zapatero, who holds the EU’s rotating presidency.

Lifeline

Whether from individual countries or the EU as a whole, a financial lifeline for Greece would open a new chapter in the euro experiment by breaking with the orthodoxy that each country has to steer its own economy.
Germany will demand "tough pre-conditions" on any rescue package, Markus Ferber, a member of Merkel’s bloc in the European Parliament, said yesterday after contacts with federal officials.
EU treaties bar the ECB or national central banks from bailing out members countries through buying their debt or offering loans, while rules on government-to-government support are more ambiguous.
One clause in the Lisbon Treaty, a rulebook adopted last year after almost a decade of haggling, permits EU financial aid for a country in "severe difficulties caused by natural disasters or exceptional occurrences beyond its control."
All options are under consideration, including a standing facility to provide credit guarantees as part of a mix of national and EU measures, an EU official told reporters in Brussels.