Greece Nears Getting Aid, Warns Against Default Bets (Update2)

By Simon Kennedy and Flavia Krause-Jackson
April 26 (Bloomberg) -- Greece moved toward getting an emergency aid package before debt payments come due in mid-May as Finance Minister George Papaconstantinou warned investors they will "lose their shirts" if they bet the cash-strapped nation will default.
Speaking to reporters in Washington yesterday as he negotiated a three-year loan plan with the International Monetary Fund and European governments, Papaconstantinou said money will be available "rather soon" and his country wouldn’t restructure its debt. Dominique Strauss-Kahn, the IMF’s managing director, said talks will end "in time to meet Greece’s needs."
With 8.5 billion euros ($11.3 billion) of Greece’s bonds maturing May 19, any delay in assistance may trigger another sell-off in its assets and hurt global markets. Debt totaling
115 percent of gross domestic product in 2009 and a budget gap of almost 14 percent have some investors concerned Greece can’t fund itself, forcing it to seek a lifeline of as much as 45 billion euros for this year alone.
Greece’s fiscal crisis dominated the weekend meetings in Washington of finance ministers and central bankers from around the world. Those from the Group of 20 pledged "credible"
strategies to withdraw economic stimulus as the global recovery beats expectations. They failed to narrow a split over whether to tax banks to pay for rescues and chose not to intensify pressure on China to let its yuan gain.

Greek Eclipse

"Greece has eclipsed everything," said Sophia Drossos, co-head of global foreign-exchange strategy at Morgan Stanley in New York. "It’s a fluid and fast-moving situation that has captured the attention of markets not least because it has the potential to be a systemic threat."
Even with the first bailout of a euro-area member approaching, markets are signaling concern Greece’s fiscal woes may still not be over as the country tries to return its deficit beneath the European Union’s 3 percent limit by 2012. A rebound in Greek bonds petered out on April 23 after the government’s request for support.
The yield on the two-year bond, which dropped as low as
9.63 percent on Friday, rose 1 basis point to 10.146 percent today. Investors demand Greece pays almost triple what they charge Germany for its 10-year bonds.
The euro, which has dropped 7 percent against the dollar this year, was little changed at $1.3382 at 8:03 a.m. in London.

Bridge Loans

Left unsaid at the weekend was what assistance Greece may receive beyond this year and what further austerity measures it will have to sign up to in return for aid. Germany’s government, which would be the biggest euro-area donor to the package, must also overcome domestic skepticism and pass legislation before it can provide cash.
"Neither the EU nor the government has made a decision yet," German Finance Minister Wolfgang Schaeuble told the Bild- am-Sonntag newspaper. "Under these circumstances, a decision can still turn out positive or negative."
Papaconstantinou said bridge loans may be possible if countries can’t secure an accord in time. Italian Finance Minister Giulio Tremonti warned Germany against dragging its feet, saying "if your neighbor’s house catches fire, it’s not to your advantage to sit back."
"The whole thing is moving terribly close to the wire,"
Erik Nielsen, chief European economist at Goldman Sachs Group Inc., said in a report to clients yesterday from Washington. A deal is needed by around May 6 so aid can be delivered before debt payments come due, he said.

No Restructuring

While Nielsen said he sees an "overwhelming probability"
that the government may cut or delay payments to bond investors, Papaconstantinou said a restructuring is "off the table."
Canadian Finance Minister Jim Flaherty told reporters that some in the G-20 worry the plan now being crafted is "not enough" and want to ensure any rescue is a "one-time event."
Greek Prime Minister George Papandreou must also navigate opposition at home after unions and political rivals slammed him for turning to the IMF, criticized in the past by Asian and Latin American nations for demanding too many cuts. Strauss-Kahn said Greek citizens "shouldn’t fear" the lender.
In a statement released after talks on April 23, G-20 policy makers vowed to explain how they will pare the measures they implemented to combat the recession as the economic rebound proves "better than previously expected."

Bank Levy

"What we’re seeing with Greece, and we’ve been seeing in the last few weeks, are the indications of the limits with fiscal stimulus," Bank of Canada Governor Mark Carney said.
"We’re not talking about Greece going bust," the IMF’s No. 2 official, John Lipsky, said in an interview with Bloomberg Television.
An IMF recommendation that future bank bailouts be paid for through a levy on financial companies split the group, which asked for more research before leaders meet in June. The G-20 maintained a year-end deadline for outlining a plan to raise the quality and quantity of capital held by banks to protect themselves against future shocks, yet members are still at odds over the exact details.
The G-20 statement made no joint comment on exchange rates and officials said they weren’t discussed, handing China relief from recent demands to let the yuan to rise. U.S. Treasury Secretary Timothy F. Geithner said "it’s in their interest"
for the Chinese to allow an appreciation.
European Central Bank officials in Washington played down speculation that Greece’s woes could spill over to other high- deficit countries. Former IMF Chief Economist Kenneth Rogoff said in an interview that Greece is unlikely to be the last euro nation to need IMF help, with Ireland, Spain and Portugal "conspicuously vulnerable."
"There is no economic cause for a contagion discussion,"
ECB Governing Council member Ewald Nowotny said in an interview.