Greek Prime Minister George Papandreou, fresh from winning a EU contingency aid package last week, now has to prove he can keep his nation’s finances afloat.
His government still has to raise as much as 15.5 billion euros (US$21 billion) by the end of May, almost as much debt as it sold in the first quarter, says Petros Christodoulou, head of the country’s debt agency. Failure to do so could spark a new round of the fiscal crisis and trigger the use of the aid plan crafted by EU leaders in Brussels on Thursday.
“Greece still needs to raise a big amount of money, and there is no guarantee that they can do it cheaply,” said Robin Marshall, director of fixed income in London at Smith & Williamson Investment Management. “There’s still a lot of uncertainty, and we don’t know whether this mechanism that is being put in place works until it’s tested.”
Papandreou told reporters on Friday that Greece would “find the opportune time to go out on the market.”
The aid mechanism removes the risk of Greece failing to repay bond investors and “should tighten the spreads materially,” Christodoulou said in an e-mailed response to questions the same day.
He declined to comment after the Financial Times quoted him on Saturday as saying the country would “like to return to the market within March.”
Papandreou demanded financial aid from the EU to help Greece cut its borrowing costs, which he said were unsustainably high. Even after the bailout pledge, the yield on Greek 10-year bonds is still 3.06 percentage points above the rate on comparable German securities, the European benchmark. The gap was 2.39 percentage points at the start of this year and as high as 3.96 percentage points in January.
Euro-area countries would grant more than half the loans and the IMF would provide the rest in the deal struck last week. Papandreou says he never expects to seek assistance.
Its “counterproductive” to speculate about the scenarios, including developments on spreads, that would spur an aid request under the new facility, he said.
Goldman Sachs Group Inc chief European economist Erik Nielsen estimated Greece would ultimately need an 18-month package of as much as 25 billion euros, with the IMF providing about 10 billion euros of that.
Greece faces about 12 billion euros of debt repayments next month, with 8.2 billion euros of five-year bonds and about 3.9 billion euros of bills maturing that month. It must repay 8.5 billion euros of 10-year bonds in May.
While those are the only bond maturities Greece faces this year, it needs an average of almost 2 billion euros a month to cover the budget deficit and interest payments on existing debt, its deficit reduction plan shows.
The government aims to cut its shortfall by 4 percentage points this year from last year’s 12.7 percent of GDP, before satisfying the EU’s 3 percent limit by 2012.
“The announcement of the bailout mechanism for Greece should end the immediate liquidity and therefore default risk for Greece,” Laurence Mutkin, head of European fixed-income strategy in London at Morgan Stanley, wrote in a report to clients. “However, we think that the longer term trajectory for Greece remains uncertain.”
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