German delay on Greek deal rocks market

GERMANY and the International Monetary Fund demanded clearer details on Greece’s planned budget cuts yesterday, spooking markets into pushing the country’s borrowing costs to the highest level in 12 years.

German chancellor Angela Merkel said the €45bn (£38.8bn) support package offered by the European Union and the IMF would stand firm provided “tough measures” were adopted by Greece. Economists suggested these would involve deep public sector cuts, tax hikes and sales of state-owned assets.

Such harsh steps would cause severe social unrest in Greece, with further strikes and riots likely.
Markets became jittery after German finance minister Wolfgang Schaeuble said Athens needed to firm up its austerity programme for 2011 and 2012 to qualify for aid.

The yield on two-year bonds rose to a painful 13.7 per cent. The ten-year yield jumped to 9.7 per cent in afternoon trading – the highest rate since 1998. The euro slid one per cent against sterling.

Nick Kounis of Fortis said: “Markets view [the support package] as a way to avoid a restructuring of Greece’s debt, and anything that hints at obstacles to it coming through makes them incredibly nervous.”

Greece needs to repay €8.5bn of loans on 19 May. The eurozone has offered bridge loans in case a rescue deal is not hammered out in time, but Evolution Securities’ Elisabeth Afseth said failure to secure the full package would be “very disappointing”. “If they don’t get the full package through by then you’d worry there are issues that are in disagreement,” she said.

Analysts say the EU and IMF’s safety net will cover Greece’s borrowing needs this year. But Barclays said a further €45bn would be needed next year as the hugely indebted nation will continue to struggle to access public debt markets to finance itself.

Others worry that even with the existing support mechanism in place, lenders to Greece will have to take a “haircut” on the value of their bonds.

Greek finance minister George Papaconstantinou remained defiant, saying speculators betting on a default would “lose their shirts”.