Samaras sweats as Germany holds back on debt relief

As Greek Prime Minister Antonis Samaras wins German praise for sticking with a bailout program while the economy crumbles, it’s not enough to pin down German support to lighten the heaviest debt load in the euro region.

German Finance Minister Wolfgang Schaeuble is holding Samaras to promises tied to 240 billion euros ($319 billion) of rescue funds. As unemployment hits a record, the Greek parliament adopted last week the final piece of a plan to put 4,200 state employees on notice for dismissal before euro partners signed off on this month’s 2.5 billion-euro payment.

With Greek 10-year bond yields six times Germany’s almost four years after the European debt crisis blew up in Athens, the country is still reliant on handouts. Chancellor Angela Merkel, facing re-election in September, is desperate to avoid another Greek debt restructuring and upsetting her taxpayers, who have contributed the most to the rescue.

“Greece needs debt relief to make debt sustainable, but this isn’t something that can enter the German election debate easily,” said Lefteris Farmakis, an analyst at Nomura International in London. “Germans will not accept haircuts. They prefer to grant a very long-term loan with a very low coupon than accept the need for a haircut on official loans.”

The yield on 10-year Greek bonds has dropped to 10.07 percent from as much as 11.49 percent a month ago when Samaras’s government was shaken by his decision to shut down the state broadcaster, leading a partner to abandon the coalition.

While that put the difference in borrowing costs compared with Germany at 8.40 percentage points, the spread was 6.71 percentage points on May 22, the narrowest since October 2010, as Samaras pointed to progress on meeting the bailout terms.

Schaeuble left the door open to relief on a visit to Athens on July 18 when he said “other measures” will be considered next year if Greece takes the steps required and achieves a surplus in its budget before interest payments.

The International Monetary Fund requires that Greek debt come down to below 124 percent of gross domestic product by 2020 to continue to provide financing for the country. The nation’s obligations will peak this year at 175 percent of GDP and begin to decline should Greece stick to the program of spending cuts and structural reforms, according to the troika of inspectors from the European Commission, IMF and European Central Bank.

The Greek debt burden is almost double the average of the 17-nation euro area, according to the European Union’s statistics office on July 22. First-quarter debt stood at 160.5 percent of GDP, while in the bloc, it was 92.2 percent.

Creditors have mooted cutting the rates on bailout loans and suspending interest payments, measures which have been used in the past. Most of the country’s 318 billion-euro debt is now owed to taxpayers in euro area nations and the IMF.

“It’s obvious that in order to change the situation in a meaningful way you ultimately need to have the official sector make some further concessions,” said Riccardo Barbieri, chief European economist at Mizuho International in London. “It’s highly likely there will be some degree of official debt forgiveness, but first Greece needs to show improvements.”

Merkel ruled out a writedown on debt held by Greek bailout funds and said there was no question of a further reduction for private investors after they participated in the biggest debt restructuring of its kind last year.

Merkel’s View

“I’ve said repeatedly that I don’t see a debt cut for Greece,” Merkel told reporters in Berlin on July 19. “All this talk about it sometimes worries me.”

The IMF’s executive board is set to discuss the results of the latest review of Greece’s progress today to approve a 1.8 billion-euro payment due in August. Greece will get 2.5 billion euros from the euro area this month, along with 1.5 billion euros from profits earned on bond purchases by euro-area central banks. A German parliamentary committee also is scheduled to consider giving the green light for payment today.

In October, Greece will be in line for another 500 million euros from its bailout package and the same amount from bond profits, assuming it passes the next set of milestones.

Creditors are parceling out funds after wage and pension cuts and tax increases spurred unrest and political instability, leading to delays. Greece is the only country in the euro region so far to require a second funding package.

Deeper Recession

The day he visited Athens, Schaeuble told ARD television in an interview that he couldn’t rule out Greece needing another program after 2014. The country’s economic outlook remains “uncertain,” the EU-IMF-ECB troika said on July 8.

The country is in a sixth year of recession, with growth of 0.6 percent forecast for next year by the troika. Unemployment in the first quarter reached a record 27 percent.

Deposits fell 700 million euros in June, the first decline since April, the central bank said on July 25, suggesting Greeks are using savings to make ends meet. Disposable income in the first quarter fell 6.2 percent as wages declined 11 percent, the Hellenic Statistical Authority said the same day.

Debt will be in the spotlight in the next troika review, which comes after the German election on Sept. 22, when a closer look will be taken at Greece’s state-asset sales plan, which has fallen short of expectations.

The revenue target for asset sales, used to pay down debt, has been repeatedly revised because of delays. Greece failed last month to sell national gas company Depa SA.

The Greek financing gap, put by the EU at 3.8 billion euros by the end of 2014, will be discussed before restarting the mission in September, an official in Brussels said on July 26.

Greece will need to identify another 8,300 state employees to join the “reallocation” program by the end of September and another 12,500 by the end of the year as part of commitments, as well as dismiss 4,000 people outright by the end of 2013.

“We’re now down to the hardest part of the program, namely reallocating or letting go government employees,” Barbieri said. “Official lenders want to see some evidence the government is serious about cutting employment.”

[Bloomberg]