European Finance Chiefs Seek Greek Agreement Amid Economic Gloom

| November 12, 2012 | 0 Comments

European finance chiefs will seek a
program to maintain Greek solvency today after the country’s
parliament approved a raft of austerity measures, even as the
currency union confronts the prospect of a worsening economy.

Finance ministers from the 17-member group will meet at 5
p.m. in Brussels following the Nov. 8 agreement by Greek
lawmakers to make cuts in pensions and benefits. While the
ministers are unlikely to finalize an updated aid package, a
European official said Nov. 9 that they’ll find a way to
overcome a gap in the country’s financing this week.

“We remain confident that European support will be agreed
on by the end of November, or early in December,” Erik Nielsen,
London-based chief global economist at UniCredit SpA, wrote in a
note to clients yesterday.

While a two-month-old European Central Bank bond-buying
plan has helped ease borrowing costs for euro-area countries,
leaders including Chancellor Angela Merkel are confronting an
additional challenge as economic malaise reaches Germany, whose
indicators last week showed growth grinding to a halt.

With the threat that a showdown over the U.S. budget could
compound a slowdown in global growth, ECB President Mario Draghi
said Nov. 8 the outlook for the euro area is worsening. The euro
has fallen 0.8 percent against the U.S. dollar since Nov. 7.

While ministers probably won’t approve 31.5 billion euros
($40 billion) in fresh loans to Greece, the maturing of 5
billion euros of Greek bills on Nov. 16 won’t lead to an
“accidental default,” a European official said last week.

Extra Years

The ministers will assess whether the latest round of cuts
that Greek Prime Minister Antonis Samaras squeezed through
parliament with 153 of 300 votes, are sufficient to warrant
further aid. Samaras today garnered the support of enough
lawmakers from his three-party coalition to secure approval for
the 2013 budget.

Samaras has pressed for two extra years, until 2016, for
Greece to meet deficit-reduction targets imposed by European
governments and the International Monetary Fund. That prospect
opens a debate about how to plug the resulting financial hole,
such as engineering a buyback of Greek debt.

European leaders’ current target is to reduce Greek debt to
120 percent of gross domestic product by 2020.

Meanwhile, the ECB’s Draghi said last week that the central
bank stands ready to unleash its bond-purchasing program, known
as Outright Monetary Transactions. Investors are still waiting
for Spain to seek such a program, which would entail an aid
request to European bailout funds.

Yields Fall

Spanish Prime Minister Mariano Rajoy said Nov. 6 he needs
to know how much the ECB would push down Spain’s borrowing costs
before his government signs up to any conditions attached to
aid. Draghi said last week that the decision must be taken by
Spain and the ECB “can’t give any assurances ex ante.”

Yields on Spain’s 10-year bonds have fallen below 6 percent
since the ECB’s plan emerged, down from a peak in July of 7.6
percent. They closed at 5.8 percent on Nov. 9.

“I would be surprised if a Spanish request will be
realized this side of New Year,” UniCredit’s Nielsen said.

Merkel will meet with Portuguese Prime Minister Pedro Passos Coelho in Lisbon today. Portugal, which is receiving
bailout aid, has been given more time to narrow its budget
shortfall after tax revenues fell short of forecasts.

Merkel last week stuck to her austerity-first agenda,
saying that the only way to win back confidence in the markets
was through competition-enhancing measures and lower debt.

‘Utmost Importance’

“Investor confidence will be absent, therefore the
reduction of debt is of utmost importance,” Merkel said in a
Nov. 8 speech in Berlin.

With the euro area’s third-quarter GDP figures due on Nov.
15, any crisis-fighting measures could be damaged by a return to
recession. Economic confidence in the bloc fell to a three-year
low in October, while the European Commission expects growth of
0.1 percent in 2013 after a contraction of 0.4 percent in 2012.

The gloom has reached Germany, Europe’s largest economy,
where exports, factory orders and industrial production all fell
more than forecast in September. Business confidence in Germany
dropped to a 2 1/2-year low last month.

The global outlook could be further imperiled as the U.S.
government confronts a so-called fiscal cliff at the end of the
year. Should the administration of re-elected President Barack Obama not reach an agreement with Congress, $607 billion in
automatic tax increases and spending cuts will take effect
starting at the beginning of 2013, possibly triggering
recession.

To contact the reporter on this story:
Patrick Donahue in Berlin at
pdonahue1@bloomberg.net

To contact the editor responsible for this story:
James Hertling at
jhertling@bloomberg.net


Enlarge image
Greek Prime Minister Antonis Samaras

Greek Prime Minister Antonis Samaras

Greek Prime Minister Antonis Samaras

Chris Ratcliffe/Bloomberg

Greek Prime Minister Antonis Samaras.

Greek Prime Minister Antonis Samaras. Photographer: Chris Ratcliffe/Bloomberg

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