EU rescue plan little comfort for Greece

Creditors want higher rates

Protestors opposed to tax reforms demonstrated yesterday in Athens. More than 3,000 people took part in the Greek capital. Protestors opposed to tax reforms demonstrated yesterday in Athens. More than 3,000 people took part in the Greek capital. (Thanassis Stavrakis/Associated Press)
By Elena Becatoros
Associated Press / April 9, 2010

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ATHENS — Greece’s borrowing costs rose to a record yesterday, intensifying the country’s debt crisis and suggesting a euro-zone and International Monetary Fund rescue plan is providing little support for Athens’ struggle to avoid default.

The higher interest rates demanded by bond investors are potential poison for the Greek budget; unless they fall, the government will pay a massive premium to borrow and face a vicious cycle in which higher borrowing costs fuel fresh default fears.

A Greek default would be a further blow to confidence in the shared euro currency, which has fallen against the dollar as the crisis has escalated.

But Finance Minister George Papaconstantinou said Greece’s program to pull out of a crisis that has markets speculating the country might default would work, and European Central Bank president Jean-Claude Trichet maintained that default was not an issue for the country.

The Socialist government, elected in October, has announced a harsh austerity program that includes cuts in civil servants’ pay, pension freezes, and higher taxes, and insists it will bring its deficit down to 8.7 percent of gross domestic product by the end of the year, from a revised projection of 12.9 percent at the end of 2009.

However, the high interest rate gap, or spread, between Greek 10-year government bonds and the German equivalent, considered a benchmark of stability, show markets are unconvinced that Greece can pull it off.

Spreads that began the day at the already high figure of 401 basis points — which translates into an interest rate of 4.01 percentage points higher than German bonds — spiked to 448 basis points in the early afternoon, the highest level since Greece joined the euro in 2001.

Still, Trichet expressed confidence that Greece’s plan would work, and said the euro-zone and IMF support plan announced last month in Brussels was “a workable framework’’ and “a very, very serious commitment.’’

“I would say that taking all the information I have, default is not an issue for Greece,’’ he said at a press conference in Frankfurt.

In Athens, Papaconstantinou said Greece’s first-quarter budget deficit figures were on target, with the January-March shortfall declining by 40 percent to $5.72 billion from the first quarter last year.

Speaking in Parliament, the minister said the fall came before additional austerity measures announced March 3 took full effect.

“I reiterate emphatically that the country continues and will continue to borrow normally,’’ he said.

“We have a plan and the budget is being implemented properly and remains within its targets.’’

Papaconstantinou met Wednesday with a delegation of IMF inspectors to seek advice on how to speed up fiscal reforms.

But the massive spike in interest rates shows markets are still concerned and some analysts are saying a bailout or default is a matter of time.

“There can now be little doubt that Greece will have to turn to the IMF for help,’’ said UBS currency strategist Beat Siegenthaler.

With bond yields high and reports of depositors moving money out of Greek banks, “time could quickly run out,’’ he said.

Bank of Greece figures show that in January and February, Greek corporations and households withdrew some $11.25 billion in deposits, leaving the total at $305.14 billion — slightly more than in February 2009.

But a central bank official said the trend was changing.

“In the past two or three weeks this tendency has been reversed . . . and deposits have not been withdrawn,’’ the official said, speaking on condition of anonymity in line with bank policy.