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Greece faces tight timeline before May debt crunch

Source: Reuters - Tue 27th Apr 2010

Greece is likely tap an EU/IMF aid package to get over its 10 billion euro (8.7 billion pound) debt refinancing hump in May, but the complicated and time-consuming process may make it a close-run affair.

A German election, the time required to negotiate the aid, and the need for some European governments to get approval from their parliaments could make it hard for Athens to tap the funds before the biggest part of the refinancing, an 8.5 billion euro bond, comes due on May 19.

Greece began talks with the European Union and International Monetary Fund on Wednesday to hammer out details of an economic plan that could clear the way for Athens to apply for some 40-45 billion euros in emergency loans from them.

Greek Finance Minister George Papaconstantinou said the talks would last two weeks and a joint text would then be agreed by May 15 - just four days before the Greek bond matures.

"They're really playing it close. What they need is the money a few days before the bond comes due" on May 19, said Christian Keller, a strategist at Barclay's Capital. "But it would be doable if the Greeks were to ask for it next week."

Athens might conceivably apply for aid before the talks had ended, but another event might delay the application: the May 9 election in the state of North Rhine-Westphalia in Germany, where public opinion is strongly against helping Greece.

Chancellor Angela Merkel fears approving German aid to Greece before the election could hurt her party's chances in the polls; her centre-right majority in parliament's upper house is at risk. She would no doubt prefer Greece to wait until after the vote before formally submitting a request for aid.


After Greece applied for aid, it would next have to obtain approval from the European Commission and the European Central Bank, as well as assent from all 16 euro zone states, for the aid mechanism to be activated.

These approvals might be won very quickly, conceivably within hours, if the EU felt it faced an emergency.

But domestic parliamentary approval would then be required for some countries - including Germany, which would be the largest national contributor - to actually disburse money. The IMF's board would need to approve disbursal of IMF loans.

Hopes for quick action on an aid application by Germany's parliament took a blow on Wednesday when the opposition Social Democrats (SPD) said they opposed the idea of "fast-track" approval. Resistance from the SPD and other parties could drag out the parliamentary approval process for weeks.

In this scenario, Greece might obtain enough emergency loans in May to cover that month's 10 billion euro refinancing need, but not enough to reassure the financial markets that it could get through the rest of the year.

If Greece needed to buy time in this scenario, it could try to return to the markets to borrow money, perhaps by issuing short-term Treasury bills with maturities of only several months that investors would feel relatively safe in buying.

But soaring bond spreads suggest that in any return to the markets, Greece would have to pay a prohibitively high price.

"Have you seen the pick-up in the spread over the last few days?" said Simon Tilford, chief economist at the Centre for European Reform. "There's a real problem there. I think they'll get the money (if they go to the market), but at these interest rates, that's ruinous."

The yield on 10-year Greek government bonds has climbed to around 8.0 percent. If Greece were to borrow at current levels to refinance the 39 billion euros in debt it has coming due over the next 12 months, it could add some 1.4-2.5 billion euros to annual debt maintenance costs.

That could raise Greece's budget deficit by as much as roughly 1 percentage point, according to Reuters calculations, foiling the government's efforts to slash the budget deficit by 4 points to 8.7 percent of gross domestic product this year.


Some analysts think that to avoid political delays in Europe, Athens could potentially go straight to the IMF for help. But bypassing European governments would anger them.

It might also be difficult to accept for the Greek public, where unions, employers, opposition parties and the media have warned that the IMF will insist on new austerity measures, and hope the European Commission will act as a buffer.

"When push comes to shove, something will happen, whether that's the IMF providing its tranche earlier than the euro zone, or the European Commission providing some temporary funds," said Ben May, an economist at Capital Economics.

Regardless of when and how Greece obtains emergency loans, many analysts now believe that sometime in coming years, Athens will probably have to restructure its debt or default.

The challenges of cutting the budget deficit during a deep recession, and of restructuring an uncompetitive economy in the euro zone's monetary straightjacket, may simply be too great.

"The mess looks pretty much undoable" said Tilford. "There is going to have to be a debt restructuring; the question is how big a haircut investors are going to have to take."

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