September 27, 2023

Pressure Builds for Greece and Portugal Despite Bailouts

ATHENS — The International Monetary Fund warned on Wednesday that Greece’s drive to shore up its troubled finances would fail unless it sharply accelerated its economic overhaul, and the European Central Bank hit back at suggestions that a debt restructuring might be the solution.

European finance ministers broke a taboo this week and acknowledged for the first time that some form of restructuring might be required to ease Greece’s debt burden, which at 150 percent of annual output is among the highest in the world.

They have said they could ask private creditors to agree to a voluntary extension of the maturities on their Greek debt but have also made clear that the priority is to ensure an acceleration of economic measures.

“The program will not remain on track without a determined reinvigoration of structural reforms in the coming months,” Poul Thomsen, an I.M.F. envoy who is monitoring Greece’s progress, told a conference in Lagonisi, near Athens.

“Unless we see this invigoration, I think the program will run off track,” he said, in one of the strongest warnings to Greece since it sealed the rescue one year ago.

Prime Minister George Papandreou’s government has struggled to rein in rampant tax dodging and is under acute pressure to begin selling off state assets to help Greece meet fiscal targets tied to last year’s €110 billion E.U./I.M.F. bailout.

Under its rescue terms, Athens is charged with reducing its budget deficit to 7.6 percent of G.D.P. this year. Mr. Thomsen said that without further measures Athens would not be able to get it much below 10 percent.

The euro struggled to hold onto gains against the dollar and the cost of insuring Greek debt against default rose on Wednesday amid ongoing talk of a restructuring.

In another sign of the stress on the euro-zone’s weakest countries, Portugal’s borrowing costs rose at a treasury bill auction on Wednesday, two days after E.U. finance ministers approved a €78 billion bailout for that country.

The Portuguese debt agency issued €1 billion of two-month treasury bills at an average yield of 4.657 percent, up from 4.652 percent in an auction of three-month paper — the closest comparable maturity — on May 4. The yield was above market expectations.

Separately, the National Statistics Institute said unemployment jumped to 12.4 percent in the first quarter from 10.6 percent a year ago, showing the strong economic headwinds the country faces after entering recession this year.

Euro-zone ministers have not spelled out how what they refer to as a “reprofiling” of Greek debt would work. Convincing private holders of Greek bonds to voluntarily accept later repayment could be difficult and require costly guarantees to avoid a hit to banks.

Such a move would buy Greece more time but not reduce its overall debt burden. Many economists believe it would be followed by a more aggressive restructuring involving “haircuts,” or forced losses, of 50 percent or more from 2013, when policymakers have said they could opt for radical steps.

The European Central Bank, which holds up to €50 billion in Greek sovereign bonds on its own books, has warned that even a “soft restructuring” would put the stability of the euro zone at risk.

“I’m opposed to soft restructuring because I don’t know what it means. Nobody knows what it means,” Lorenzo Bini-Smaghi, a member of the bank’s executive board, said in Milan on Wednesday.

Speaking in Athens at the same conference as Mr. Thomsen, another E.C.B. board member, Jürgen Stark, said it was an “illusion” to think such a move would resolve Greece’s problems. E.C.B. vice president Vitor Constancio said it should only be done as a last resort.

European politicians, however, are under pressure from angry taxpayers to broaden out the burden of their bailouts to include the banks that have bought up Greek debt in recent years.

But they have pledged not to force any losses on private holders of Greek debt before 2013, when a new anti-crisis facility — the European Stability Mechanism — is due to take effect.

Before that, any burden-sharing must be done on a voluntary basis, they have said.

“During the crisis, it was almost exclusively European taxpayers that ultimately bore the risk of investors’ decisions. That is inadmissible,” the German Finance Minister Wolfgang Schäuble said in a speech in Brussels.

“It was right to stop financial markets from disintegrating in the past but it would be wrong to cushion their losses in the future,” he added.

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