Greece's borrowing costs jump despite aid pledge

Financial markets upped the pressure today on debt-ridden Greece, as investors remained sceptical about its long-term solvency despite assurances that a rescue loan will soon help pay off a chunk of the country's crushing debts.

Market fears appeared driven by Germany's grudging attitude toward bailing Greece out, which could delay the funds. Longer term, some economists think Greece's growth prospects are so weak the government will not be able to collect enough taxes to meet its debt obligations years down the road.

The interest rate gap, or spread, between Greek bonds and benchmark German 10-year bonds reached a record 6.5 percentage points today before retreating slightly. That means that if Greece were to try to borrow on the bond markets, it would have to offer interest approaching 10 per cent — three times what economic powerhouse Germany pays.

The higher rate reflects fears that Greece is too risky to lend to and may some day fail to pay back what it owes. Greece's troubles have undermined the euro and raised concerns that its debt crisis may spread to other financially weak governments in Europe, including Portugal, Spain, Italy and Ireland.

"When the question at issue is whether we can borrow, one realizes how difficult a position the country is in," government spokesman George Petalotis said today.

Michael Massourakis, chief economist at Alpha Bank, attributed the spike to German reluctance to expedite the aid.

"Nothing has changed over the weekend, except that Germany seems to be having some problems in terms of committing itself to the rescue package," he said. "Markets have been testing whatever decision has been made in the last 2 or 3 months, and I think every case of uncertainty makes (them) jittery."

Berlin says it will not act in haste on the aid, which will need parliamentary approval in any case. Chancellor Angela Merkel, who has her eye on winning local elections on 9 May, says Greece needs to show its commitment to long-term budget cuts first. Many German voters are not happy with the prospect of having to bail out Greece.

Greek Finance Minister George Papaconstantinou said a rescue package from countries using the euro and the International Monetary Fund will allow the country to redeem some €8.5bn ($11.3bn) in 10-year bonds expiring on 19 May.

Squeezed between a massive budget deficit and a €300bn public debt, which shocked Greece's EU partners and alarmed markets, the centre-left Socialist government initially vowed to continue raising cash through debt issuance.

But spiraling borrowing costs forced Athens last week to request a €40bn ($53bn) financial aid package from the IMF and the other 15 states using the euro currency.

Papaconstantinou said he expected the IMF board to approve its portion of the loan support — around a quarter of the total — in the first 10 days of May. He said if some European parliaments were delayed in approving their contributions, the IMF support could be used to obtain bridge financing from other sources.

After a meeting with Prime Minister George Papandreou Monday, Papaconstantinou said the negotiations were going well.

"We hope they will be completed soon with a three-year framework of economic policy and the terms of financing so that Greece can continue to borrow freely, as I'm certain it will, to cover our borrowing requirements," he said.

The debt crisis emerged late last year when Greece abruptly raised its deficit figures and admitted the previous government had issued years of questionable financial data.

Greece has pledged to cut its deficit to 8.7 per cent of annual output this year, from a revised 13.6 per cent in 2009, through broad spending cuts and more efficient taxation.

"I think markets have to be convinced that there is a high probability of success in terms of adjustment," Massourakis said. "Greece has never had much of an adjustment in the past few years, so there is a lot of fat to be cut."

Today, official statistics said the country's trade deficit shrunk 26.9 per cent in January and February 2010 to €3.68bn, compared to the corresponding period in 2009.

A team from the IMF, the EU and the European Central Bank has held talks for the past week in Athens on Greece's cost-cutting programme. Officials say the experts have advised expanding the cuts to the private sector, by abolishing two extra monthly salaries that Greek employees receive.

Petalotis, the government spokesman, said that move would lead to "an unbearable standard of living" for the average Greek and cost the state some €2 billion in contributions to its tottering social security system.

Papaconstantinou said he did not expect the IMF to demand more painful measures than Greece's eurozone partners.

"It is a mistake to believe that the IMF has come to impose harsher or different terms than those we are discussing with our European partners," he said. "There is a common approach, that Greece must in coming years drastically reduce its deficits, control its debt and make all structural adjustments required for a more competitive economy."

Unions have reacted angrily to the rescue plan, as well as extant and expected new austerity measures.

Unrest spread to Greek air force pilots today, who claimed "psychological inability" to carry out training flights to protest a revision of their tax status.

Defence Minister Evangelos Venizelos said he was "deeply disappointed" with the pilots.

Ferries were confined to port today by a 24-hour seamen's strike against reforms meant to boost cruise tourism. Tomorrow, Athens public transport workers will walk off the job for six hours and the main civil servants' union, ADEDY, is holding a protest rally in the evening.