Greek Leader Irked by Speculation on Debt

But even as Greece and the European Union denied the reports and sought to calm nervous markets, other European officials acknowledged that the country needed its loans adjusted after new figures showed a deep recession and higher-than-forecast fiscal debt.

Instead of a projected budget deficit of 9.4 percent of gross domestic product in 2010, the Greek deficit was 10.5 percent, despite some harsh austerity measures, in part because the economy shrank faster than expected.

The new wave of concern about Greece will reverberate, and will probably complicate coalition negotiations for a new government in Finland, and affect the Portuguese election next month.

The anxiety is another sign that the European Union’s efforts to save the euro by propping up countries that can no longer borrow freely from the market are hardly finished. Greece, Ireland and now Portugal have gone to the union for large loans to protect them from investors demanding high yields, to allow them to pay interest on their debts and to create time for them to restructure their economies. But skeptics believe that in the end, Greece and Ireland will have to restructure their debt — paying back less than face value.

Even after the austerity and adjustment program, Greece will face loans of more than 150 percent of gross domestic product, a debt mountain that many think is unsustainable, even with better tax collection and economic growth.

Mr. Papandreou, European finance ministers and others on Saturday denied any thought of restructuring Greece’s debt, let alone having Greece exit the euro, which would allow it to devalue. And quitting the euro is considered enormously complicated and even self-defeating by numerous economists, since Greek debt is denominated in euros.

“I call on everyone, inside and outside Greece, in the E.U. in particular, to leave Greece in peace to do its job,” Mr. Papandreou said on Saturday. “Greece is doing its job.”

Officials of the European Commission, the European Central Bank and the International Monetary Fund are in Greece assessing the state of the economy to report to finance ministers meeting in Brussels on May 16 and 17, said a spokesman for the economic affairs commissioner, Olli Rehn.

The spokesman, Amadeu Altafaj, denied that a meeting Friday evening of some key finance ministers in Luxembourg was any sort of “?‘crisis meeting on Greece,’ as presented in some press reports,” in particular Spiegel Online. The meeting, he said, was “informal,” but Greece was clearly a major topic of discussion and Greece’s finance minister, George Papaconstantinou, was asked to attend. He repeated that “debt restructuring is not an option on the table,” given that “its effects could be extremely negative for the country and for the euro area as a whole.”

Afterward, Jean-Claude Juncker of Luxembourg, who leads the group of euro zone finance ministers, said the Greek program “does need a further adjustment” that would be discussed in mid-May.

What is likely is a kind of soft restructuring, in which Greece will be given more time to pay its loans. Major bondholders — which include French, German and Greek banks, as well as the European Central Bank — could agree to exchange their debt for securities with longer maturities and even a lower interest rate rather than face the possibility of getting back only a percentage of their loans. That would make it less likely that the countries involved have to go to their taxpayers and ask for more money to prop up national banks, which would be deeply unpopular, especially in Germany.

Greece was given a 110 billion euro bailout last year, whose terms were already eased by the European Union in the spring.

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Ministers Meet to Study Fixes on Greek Debt

After the private gathering, the prime minister of Luxembourg, Jean-Claude Juncker, who heads the group of euro-area finance ministers, said that Greece’s financial assistance program “does need a further adjustment” and that it would be discussed at the group’s next meeting on May 16.

Mr. Juncker told reporters that European Union officials were “excluding the restructuring option which is discussed heavily in certain quarters of the financial markets,” according to Bloomberg News.

France, Germany, Italy and Spain were represented at the meeting in Luxembourg, which also included the president of the European Central Bank, Jean-Claude Trichet, and Olli Rehn, the European commissioner for economic and monetary affairs, Mr. Juncker said.

A spokesman for the Greek finance ministry did not respond to questions about the nature of the talks.

But after an evening of intense speculation, Athens confirmed in a statement that its finance minister, George Papaconstantinou, attended the meeting and discussed the country’s economic predicament. “The minister was invited to exchange views” including economic developments in Greece, the statement said, denying an online report by Der Spiegel of Germany that Greece might leave the euro zone. That report caused a sharp drop in the euro, which fell to $1.4337 in New York, from $1.4530 late Thursday.

“It is clear that during this meeting it was never discussed or posed as an issue whether Greece would remain in the euro zone,” the statement said, according to Reuters.

That Mr. Papaconstantinou traveled to Luxembourg for these discussions suggested that Greece might finally be prepared to concede what analysts have been arguing for more than a year: that Greece’s debt, which is expected to exceed 150 percent of gross domestic product in the coming years, is unsustainable.

So far, Greek and European officials have said consistently that a debt restructuring that would cause bondholders to suffer a haircut, or a loss on their holdings, was out of the question. But that stance may not preclude a softer option in which bondholders might be persuaded to exchange their shorter maturity debt for securities with longer maturities and perhaps even a lower interest rate.

The majority of the bondholders are French, German and Greek banks, as well as the European Central Bank.

Referred to as a reprofiling, this softer approach was used successfully in Uruguay in 2003 and for weeks now has been a hot topic for discussion among policy makers in Europe as well as economists and analysts at investment banks.

A reprofiling would allow bondholders to avoid the stark losses they would face under a restructuring and would also give breathing room to Greece to generate enough cash to begin paying its debts.

Detractors say that such a solution, while appropriate for Uruguay, which suffered from a liquidity crisis, does not go far enough in the case of Greece, which is confronting a huge debt burden.

Policy makers at the European Central Bank are convinced that a Greek default would quickly undermine confidence elsewhere in the euro area and raise borrowing cost for other countries like Portugal and Ireland. It was also not clear what Greece would gain from such a move because its banks would fail and it would be years before the country could borrow internationally again.

Asked about default speculation at a news conference on Thursday, Mr. Trichet said, “It is not in the cards.”

The meeting in Luxembourg, made up of just a few ministers and senior officials, frustrated the euro zone nations not invited.

Without the status of a formal meeting, the gathering could not make any decisions, but smaller euro zone nations are sensitive about suggestions that the bigger nations are effectively deciding policy.

Jack Ewing contributed reporting from Frankfurt.

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Ministers Meet to Study Fixes on Greek Debt

After the private gathering, the prime minister of Luxembourg, Jean-Claude Juncker, who heads the group of euro-area finance ministers, said that Greece’s financial assistance program “does need a further adjustment” and that it would be discussed at the group’s next meeting on May 16.

Mr. Juncker told reporters that European Union officials were “excluding the restructuring option which is discussed heavily in certain quarters of the financial markets,” according to Bloomberg News.

France, Germany, Italy and Spain were represented at the meeting in Luxembourg, which also included the president of the European Central Bank, Jean-Claude Trichet, and Olli Rehn, the European commissioner for economic and monetary affairs, Mr. Juncker said.

A spokesman for the Greek finance ministry did not respond to questions about the nature of the talks.

But after an evening of intense speculation, Athens confirmed in a statement that its finance minister, George Papaconstantinou, attended the meeting and discussed the country’s economic predicament. “The minister was invited to exchange views” including economic developments in Greece, the statement said, denying an online report by Der Spiegel of Germany that Greece might leave the euro zone. That report caused a sharp drop in the euro, which fell to $1.4337 in New York, from $1.4530 late Thursday.

“It is clear that during this meeting it was never discussed or posed as an issue whether Greece would remain in the euro zone,” the statement said, according to Reuters.

That Mr. Papaconstantinou traveled to Luxembourg for these discussions suggested that Greece might finally be prepared to concede what analysts have been arguing for more than a year: that Greece’s debt, which is expected to exceed 150 percent of gross domestic product in the coming years, is unsustainable.

So far, Greek and European officials have said consistently that a debt restructuring that would cause bondholders to suffer a haircut, or a loss on their holdings, was out of the question. But that stance may not preclude a softer option in which bondholders might be persuaded to exchange their shorter maturity debt for securities with longer maturities and perhaps even a lower interest rate.

The majority of the bondholders are French, German and Greek banks, as well as the European Central Bank.

Referred to as a reprofiling, this softer approach was used successfully in Uruguay in 2003 and for weeks now has been a hot topic for discussion among policy makers in Europe as well as economists and analysts at investment banks.

A reprofiling would allow bondholders to avoid the stark losses they would face under a restructuring and would also give breathing room to Greece to generate enough cash to begin paying its debts.

Detractors say that such a solution, while appropriate for Uruguay, which suffered from a liquidity crisis, does not go far enough in the case of Greece, which is confronting a huge debt burden.

Policy makers at the European Central Bank are convinced that a Greek default would quickly undermine confidence elsewhere in the euro area and raise borrowing cost for other countries like Portugal and Ireland. It was also not clear what Greece would gain from such a move because its banks would fail and it would be years before the country could borrow internationally again.

Asked about default speculation at a news conference on Thursday, Mr. Trichet said, “It is not in the cards.”

The meeting in Luxembourg, made up of just a few ministers and senior officials, frustrated the euro zone nations not invited.

Without the status of a formal meeting, the gathering could not make any decisions, but smaller euro zone nations are sensitive about suggestions that the bigger nations are effectively deciding policy.

Jack Ewing contributed reporting from Frankfurt.

View the original article here