Greece launches critical debt issue

Posted at 03/04/10 7:02 PM

ATHENS, Greece/BERLIN, Germany - Debt-burdened Greece launched a critical bond issue on Thursday and urged Germany and other EU partners to send a clear signal of confidence in Athens to financial markets that would allow it to borrow more cheaply.

A day after announcing draconian new austerity measures, the government went to the market with a 10-year euro-denominated bond, the lead manager said, with price guidance in the area of mid-swaps plus 310 basis points.

Athens, which needs to borrow 53 billion euros ($72.43 billion) this year, badly needs the funds to repay existing debt and cover its huge budget deficit, but the cost will be high.

The pricing offered a premium of more than 20 basis points over Wednesday's closing spread over benchmark German bonds.

"We are compensating the markets to re-enter," the head of the country's debt agency, Petros Christadoulou, told Reuters.

The government was seeking a maximum of 5 billion euros with this issue, and orders had reached 7 billion in the first hour of book-building, he said.

EU Economic and Monetary Affairs Commissioner Olli Rehn said euro zone nations would take coordinated action to guarantee Greece's stability if necessary, and prevent any spillover of its debt crisis to other members with serious budget problems.

Rehn said in an Italian newspaper interview the 4.8 billion euros in extra savings announced on Wednesday were sufficient for 2010 providing they are applied fully.

"But further on, in 2011 and 2012, further measures will be necessary for Greece... for medium-term consolidation," he told Il Corriere della Sera.

Deputy Greek Foreign Minister Dimitris Droutsas made an appeal for political rather than direct financial backing as Athens tries to bring down its sky-high borrowing costs.

"What we need from our EU partners and from such an important EU partner as Germany, is an explicit, clear signal to the international financial markets that Greece and the Greek government have their full confidence," he told Deutschlandfunk radio.

"At no time has the Greek government demanded direct financial support from its EU partners. This is not necessary, Greece doesn't need it. We can, we want to clear up our state budget on our own," he added.

Thursday's bond was a crucial test ahead of a period between April 20 and end May when Greece needs to borrow or refinance 20 billion.

Without clearer European support, its borrowing costs could be cripplingly high due to a lingering lack of confidence in government's effort to get the huge deficit under control.

Prime Minister George Papandreou will meet German Chancellor Angela Merkel in Berlin on Friday, but she said on Wednesday that the question of financial aid will not be on the table.

Avoid spillover

Rehn said the euro zone had the resources to ensure stability if required. Asked if this implied an EU bailout for Athens, he said: "We are not speaking about this today. Greece has restarted well."

Other countries in both southern and northern Europe also had serious problems. "The aim of all this is precisely to avoid a spill-over effect ... from one country to another," he said.

European government sources have said Germany and France are working on contingency plans under which state-owned financial institutions would directly purchase billions of euros in Greek bonds or offer guarantees to commercial banks that bought them.

Droutsas noted that with current interest rate premiums, Greece would have to pay 750 million euros more in interest on a five billion euro loan than Germany would.

"We're trying to bring these borrowing costs down and for this we need the trust of the international financial markets. We're earning this with these measures which we have announced," he said.

The yield on 10-year German government bonds is just over three percent, whereas on the Greek equivalent it is around 6 percent. The Greek spread over German bunds

Droutsas noted that the government aimed to reduce the budget deficit to 8.7 percent of gross domestic product this year from 12.7 percent in 2009.

"We are very optimistic that with the right implementation of this package of savings measures we can reach this target in 2010. That is our obligation and something that the Greek government is undertaking very seriously," he said in the interview.

The EU -- and Germany -- praised Greece's third savings package in as many months and said Athens could count on European solidarity. But Germany, whose backing for any European safety net for Greek borrowing would be vital, has stopped short of any commitment to financial support.