Banks, Insurers Move Closer to Deal on Greek Bailout

By and Lefteris Papadimas | June 24, 2011

Banks and policymakers moved closer to a deal on Friday to help Athens secure funds ahead of a parliamentary vote on austerity next week that Greek Prime Minister George Papandreou must win to avert default.

Despite a refusal by the conservative opposition to back the plan agreed with international lenders and signs of revolt in his own socialist party, Papandreou said he was confident the deeply unpopular package of spending cuts, tax hikes and privatizations would pass.

“It is a moment of historic importance. If everybody resists, worse things will come, perhaps even bankruptcy,” Papandreou told a news conference at the sidelines of a summit of European Union leaders in Brussels.

The meeting saw euro zone governments discuss a new bailout package for Greece, which could include up to €30 billion [$42.57 billion] from the private sector to help cut Greece’s huge public debt.

President Nicolas Sarkozy said French banks had agreed to participate in a voluntary rollover of Greek debt, Spain’s Jose Luis Rodriguez Zapatero said Spanish banks were willing to take part in a scheme to buy Athens more time while Berlin has asked German banks to state their intentions next week.

“We have had many meetings with the banks and insurance companies. There is no difficulty,” French President Nicolas Sarkozy told reporters after the meeting.

However, no new money will flow unless the Greek government enacts deep cuts and markets remain skeptical. The euro fell sharply on doubts the government will win the day after a maverick ruling party member said he would vote against.

“It’s very ugly; a complete mess,” said a trader in London. “There’s a rumor the austerity won’t pass.”

After a difficult series of meetings this week, new Greek Finance Minister Evangelos Venizelos thrashed out an agreement with inspectors from the EU and the International Monetary Fund on Thursday to release the funds Greece needs immediately.

But if the vote next week is lost, international lenders are unlikely to release a €12 billion [$17 billion] funding tranche, meaning the government will run out of cash within days.

Greece accepted a package of €110 billion [$156 billion] of EU/IMF loans in May 2010 but now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

International lenders want binding commitments that Athens will push through the painful measures judged necessary to get its shattered public finances back in order.

The government won a vote of confidence this week with 155 out of 300 votes in parliament, showing how tight the June 29 vote on its austerity package could be.

In a sign of the uncertainty around the vote, which will be accompanied by a two-day general strike, one deputy from the ruling PASOK party said he will oppose the mix of higher taxes, spending cuts and state selloffs.

“Shops are shutting down every day and we are taking anti-growth measures,” party maverick Thomas Robopoulos, a car dealer from Greece’s second city, Thessaloniki, and one of the few businessmen in parliament told Reuters. “I will take the floor in parliament and try to convince them to do something.”

Daily protests continue in Athens and other cities and an opinion poll on Friday put Greece’s conservative opposition 2.1 points ahead of PASOK and showed three quarters of Greeks oppose the raft of tax hikes and spending cuts that will hit them hard.

Greece’s partners have expressed growing impatience with what they see as a refusal to face the seriousness of the situation. The attitude of the conservative opposition, which has said it will oppose parts of the package, has particularly enraged European leaders.

“I made it very clear that for the acceptance and for the stability of Greece, it would be highly desirable for the opposition to vote for this package,” German Chancellor Angela Merkel said in Brussels.

As well as reform commitments by Greece, private sector involvement in a new rescue is seen by many governments as a vital element to meet objections that European taxpayers were left to foot the bill for saving bank balance sheets.

But it has been complicated by the fact that any scheme must be voluntary, otherwise it risks being classified by credit ratings agencies as a default, or at least a “credit event”, which could have serious repercussions for financial markets.

Banking sources told Reuters that European banks and finance officials were discussing a proposal to replace existing Greek debt with a different type of bond to get around ratings agencies’ reservations.

The proposal is for a voluntary rollover of debt into securities of a different and not comparable credit composition to avoid agencies moving Greece to default status.

“I don’t want to comment on the current state of these talks, I think it’s most important for us to have these talks first and then report to you the results,” Merkel said. “I don’t think it would be wise to give you any numbers. We don’t have any hard numbers as of yet.

At the EU summit in Brussels, Papandreou promised to push through radical economic reform after Venizelos clinched agreement with EU and IMF inspectors on extra tax rises and spending cuts to plug a €3.8 billion [$5.39 billion] funding gap within an agreed five-year austerity plan worth €28.4 billion [$40.28 billion].

On Thursday, Venizelos announced additional measures including extra spending cuts, lowering the minimum income tax threshold and imposing a special “solidarity levy”, measures that will hit ordinary Greeks yet harder.

Employees at Greece’s dominant electricity producer PPC, which is slated for privatization next year, were on rolling 48-hour strikes for a fifth day on Friday. The union opposes plans to sell a 17 percent stake in the firm and said the labor action will lead to power cuts.

“Many thought the change of guard at the finance ministry would have helped the weak income groups and those who consistently pay their taxes,” said Ethnos, a centre-left daily that is normally supportive of the government. “Unfortunately, these hopes were dashed.”

(Additional reporting by Emmanuel Jarry, Julien Toyer, Fiona Ortiz, Alex Chambers and Philipp Halstrick, writing by James Mackenzie)

By Lefteris Papadimas and Jonathan Gould

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