- The Washington Times - Monday, April 26, 2010

ATHENS (AP) — Financial markets upped the pressure on debt-ridden Greece on Monday as investors remained skeptical about its long-term solvency despite assurances that a rescue loan will help pay off a chunk of its crushing debts in coming weeks.

The interest rate gap, or spread, between Greek bonds and benchmark German 10-year bonds reached a record 6.5 percentage points Monday 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 percent — 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.

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

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 two or three 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.

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

Squirming between a massive budget deficit and a 300 billion euro ($399.7 billion) public debt, which shocked Greece’s EU partners and alarmed markets, the center-left government initially vowed to continue raising cash through debt issuance.

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

Mr. Papaconstantinou said he expected the IMF board would approve its portion of the loan support — about 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.

Mr. Papaconstantinou will brief Parliament on the bailout later Monday.

The debt crisis emerged late last year when the country abruptly revised up its deficit figures.

Greece has pledged to cut its deficit to 8.7 percent of annual output this year, from a revised 13.6 percent 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,” Mr. 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.”

On Monday, official statistics said the country’s trade deficit shrank 26.9 percent in January and February 2010 to 3.68 billion euros ($4.9 billion), compared with the corresponding period in 2009.

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

Government spokesman George Petalotis said that would lead to “an unbearable standard of living” for the average Greek and cost the state some 2 billion euros ($2.67 billion) in contributions to the tottering social security system.

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

The unrest spread to an unusual area on Monday. A Defense Ministry statement said Greek air force pilots are claiming “psychological inability” to carry out training flights, in protest to a revision of their tax status.

Defense Minister Evangelos Venizelos said he was “deeply disappointed” with the pilots.

Ferries were confined to port Monday by a 24-hour seamen’s strike against reforms meant to boost cruise tourism. On Tuesday, Athens public transport workers will walk off the job for six hours, while the main civil servants union, ADEDY, is planning a protest rally in the evening.

AP Television’s Nathalie Rendevski Savaricas contributed to this report.

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