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Greece Finance Minister Says No Risk of Default (Update1)
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By Francine Lacqua and Maria Petrakis

Dec. 9 (Bloomberg) -- Greek Finance Minister George Papaconstantinou said there is “absolutely” no risk the country will default on its debt or seek a European Union bailout after a credit rating cut caused its bonds to plunge.

“We do have a credibility issue,” Papaconstantinou said today in an interview with Bloomberg Television. “As it becomes clear the deficit is coming down, that spending is reined in and that taxation receipts are going up, then confidence will return and there won’t be any problem borrowing in the markets.”

Fitch Ratings cut Greece one step to BBB+, the third-lowest investment grade, a day after Standard & Poor’s put its A- rating on watch for possible downgrade. The ratings companies cited concern the nation may struggle to meet debt commitments as its deficit balloons to a European Union-high 12.7 percent of output and it overtakes Italy as the region’s most indebted country.

The difference in yield, or spread, between Greek 10-year bonds and German bunds widened by 24 basis points to 245, up from 176 points on Dec. 4. Greece’s Athens Stock Exchange General Index declined 2.9 percent to the lowest since July 13, bringing its three-day drop to more than 11 percent.

“It’s five minutes to midnight for Greece,” Former Bank of England policy maker Willem Buiter said in a Bloomberg Television interview. “We could see our first EU 15 sovereign default since Germany in 1948.”

ECB Financing

Even without a default, a further cut in the country’s creditworthiness may make it more difficult for Greek banks to raise funds because government bonds could be excluded as collateral from European Central Bank lending. The ECB currently accepts bonds rated BBB- as collateral for loans after relaxing its rules in response to the financial crisis last year. At the end of 2010, it’s due to revert to the old rules, under which A- is the minimum required rating.

S&P said it will decide about a possible downgrade in the coming months and Moody’s Investors Service lowered its outlook on its A1 rating to “negative” on Oct. 29.

Papaconstantinou said there is no risk to the Greek banking system as the country’s banks hadn’t carried out the type of toxic lending that led to the global credit crisis and their finances are “fundamentally sound.” Still, investors shunned banks today. Piraeus Bank SA fell more than 6 percent and National Bank of Greece SA, the largest lender, lost 5.5 percent, after a 10 percent slide yesterday.

New Plan

ECB Governing Council member Axel Weber predicted Greece will manage to improve its finances over the next year. “We’ll see a consolidation,” Weber told reporters late yesterday in Frankfurt. “Officials are facing a clear necessity to implement concrete budget measures.”

The government will present the European Commission with a new deficit-reduction plan in January, based on its 2010 budget, which calls for cutting the deficit by more than 3 percentage points to 9.1 percent of gross domestic product. Papaconstantinou is seeking to prevent Greece from becoming the first country to be sanctioned under the EU’s excessive deficit procedure and trying to secure a three-year extension to the commission’s 2010 deadline for Greece to bring the shortfall back under the 3 percent ceiling.

The commission “stands ready to assist the Greek government in setting out the comprehensive consolidation and reform program,” Joaquin Almunia, who is in charge of EU economic and monetary affairs, said in a statement late yesterday.

No Bailout

Greece will not seek any kind of bailout from the commission, Papaconstantinou said, and will “do whatever is necessary to get out of the woods by our own devices.”

Under the budget plan “public expenditure is being cut by roughly 10 percent on the operating budget and 25 percent on consumption expenditures,” he said. “We’re freezing hires for 2010 and we’re moving to 5 to 1 ratio in retirement and new hires from 2011,” he said.

The current budget plan, including one-off measures and a partial freeze on public-sector pay, “are unlikely by themselves to alter Greece’s medium-term fiscal dynamics” given the prospects of high deficits, debt and sluggish economic growth, S&P said on Dec. 7. Much of the revenue gains forecast come from a crackdown on tax evasion, a regular promise of Greek governments.

“The jury is still out on whether the cabinet really backs the austerity measures that are necessary,” said Christopher Pryce, one of the London-based analysts at Fitch who cut the rating. “This budget has been put together by a very hard- working, conscientious finance minister, but nothing in it is substantial.”

Revising Statistics

The country’s credibility has also been hurt by repeated revisions of its economic data. Within weeks of winning elections in October, the socialist government raised the deficit forecast to 12.7 percent, about twice the previous government’s forecast and more than four times the EU limit. The EU in 2004 launched an investigation into Greece’s deficit after a revision of budget data revealed that, contrary to previous indications, the shortfall had exceeded the 3 percent ceiling ever since the country switched to the euro.

“Investors can expect in the next weeks and months, days even, to continue seeing signals that the situation is coming under control and fundamentally this is what they’re expecting,” said Papaconstantinou, an economist who studied at the London School of Economics and worked for 10 years at the Organization for Economic Cooperation and Development.

Debt Rising

Investor confidence will return as the government takes action to tackle the deficit and reduce the debt, which the commission predicts will surpass Italy’s to become the EU’s largest next year at 125 percent of GDP. The government has no current financing needs, meaning the wider spread won’t have an immediate impact on debt financing costs, Papaconstantinou said.

The government’s financing needs will ease next year even as the deficit rises. Greece has 17 billion euros ($25 billion) less of bonds coming due in 2010 than this year, trimming total borrowing to about 47 billion euros. Greece’s debt servicing costs will remain manageable, Laurent Bilke, an economist at Nomura in London said in a note to investors today. The country will spend 5 percent of GDP financing debt in 2011, compared with 6 percent for Italy. That’s far below the 10 percent levels of the early 1990s for both countries, Bilke wrote.

To contact the reporter on this story: Maria Petrakis in Athens at [e-mail]; Francine Lacqua in London at [e-mail].
Last Updated: December 9, 2009 07:25 EST