Greece Might Ask for Aid Before Talks With IMF End, Papaconstantinou Says

Greece Could Make Aid Request Before Talks End (Update1)

April 21 (Bloomberg) -- Greece could activate a 45 billion- euro ($60 billion) emergency aid package led by the European Union before talks on the conditions for the loans conclude in two weeks time, Finance Minister George Papaconstantinou said.

Greek bonds slumped today as the talks began in Athens. The risk premium investors demand to hold Greek bonds over comparable German debt soared to 516 basis points, the highest in at least 12 years, on concern the cash-strapped nation may struggle to repay 8.5 billion-euros of bonds maturing May 19.

“I’m not saying that the government will ask for it,” Papaconstantinou told reporters after the first session of talks with officials from the euro region, the International Monetary Fund and the European Central Bank.

The negotiations will probably last two weeks and a final text on the outcome would be presented by May 15, he said. The talks are focusing on additional deficit-cutting measures Greece would have to accept as a condition for the funds, particularly after the first year payout of as much as 45 billion euros. Prime Minister George Papandreou’s government has already raised taxes and cut spending to trim the budget shortfall by about 10 billion euros this year.

Taming Deficit

Greece’s struggle to finance a deficit of 12.9 percent of gross domestic product, four times the European Union limit, has undermined the credibility of Europe’s monetary union and led to a 6.7 percent decline in the single currency this year. Budget deficits across the region have surged as the financial crisis forced governments to bail out banks and spend billions on stimulus to ease the effects of the worst recession in 60 years.

The aid package led by the euro-region nations and backed by the IMF has “failed spectacularly” to stem rising funding costs for Greece, said Steven Major, global head of fixed-income research at HSBC Holdings Plc. He expects the government to request the aid within a week.

“We have to move to the next step to get the cash flowing and relieve that funding pressure on Greece,” he said in an interview with Bloomberg television.

The yield difference between Greek and German 10-year bonds has widened more than 100 basis points since the EU finance chiefs announced details of the bailout plan on April 11. Euro- region nations would put up 30 billion euros in loans at rates of about 5 percent in the first year. The IMF would add as much as 15 billion euros at lower rates to allow Greece to finance its debt and deficit without paying current market rates, which are now more than twice those of Germany.

The turmoil in Greek bonds sent the euro lower and roiled stock markets across Europe, with the biggest declines in Portugal and Spain, two other high-deficit countries that have come under scrutiny. Greece’s benchmark ASE Index fell 1.4 percent at 3:40 p.m. in Athens. Spain’s benchmark IBEX index and Portugal’s PSI 20 both shed about 1.6 percent.

Greeks are likely to bristle at any additional austerity measures demanded by the euro region and IMF and unions have already threatened more strikes. Protesters blocked access to Piraeus Port near Athens today forcing the cancellation of ferry services to Greece’s islands. Civil servants also plan their fourth 24-hour strike of the year tomorrow to protest against government’s deficit-reduction plans

To contact the reporter on this story: Christos Ziotis in Athens at cziotis@bloomberg.net

Last Updated: April 21, 2010 08:54 EDT

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