Europe Finance Chiefs Seek Greek Pact as Economy Gloom Grows

By Patrick Donahue - Nov 12, 2012 9:04 AM GMT+0800

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