European Leaders Deploy ‘Bazooka’ to Stamp Out Attack on Greece
February 11, 2010, 11:49 PM ESTBy Simon Kennedy and James G. Neuger
Feb. 12 (Bloomberg) -- European leaders closed ranks to defend Greece from the punishment of investors in a pledge of support that may soon be tested.
German Chancellor Angela Merkel and her counterparts yesterday pledged “determined and coordinated action” to support Greece’s efforts to regain control of its finances. They stopped short of providing taxpayers’ money or diluting their own demands for the country to cut the European Union’s biggest budget deficit.
While bonds rallied, the euro slipped and pressure is now on the governments to show how they would back up their words with action. The attention of investors now turns to a meeting of finance ministers in Brussels on Feb. 15-16.
“They’ve got to deliver next week,” said Andrew Bosomworth, head of portfolio management at Pacific Investment Management Co., which oversees the world’s largest mutual fund. “They’ve expressed the principle of solidarity and now they need to explain and quantify it.”
The European strategy echoes then-U.S. Treasury Secretary Henry Paulson’s 2008 effort to intimidate markets with financial force, said Goldman Sachs Group Inc.’s Erik Nielsen.
“It’s like Paulson’s bazooka,” said Nielson, Goldman Sachs’s chief European economist in London. “It’s a difficult balancing act -- saying something comforting to the market without committing money and hoping the market will take their word for it.”
Default Threat
In 2008, Paulson won powers from Congress enabling a government rescue of Freddie Mac and Fannie Mae -- authority he likened to a weapon whose mere existence made it unlikely it would have to be fired.
After a three-month long plunge in Greece’s bonds amid speculation it was facing the threat of default, the euro region’s leaders yesterday ordered the country to slash its budget deficit and warned investors they would be willing to defend the country from speculative attack if necessary.
The pledge lacked specifics and officials are now working on measures such as establishing a lending facility for Greece, with each country making a contribution according to its size, an EU official said yesterday on condition of anonymity.
The strategy still gives Greece breathing space to address its budget woes, said Scott Thiel, head of European fixed income at BlackRock Inc. in London.
“The reality is that the risk of the EU not supporting Greece has now gone,” said Thiel. “This is about enabling the Greeks to achieve a long-term solution.”
Money For Free?
Greece needs to sell 53 billion euros ($73 billion) of debt this year, equivalent to about 20 percent of its gross domestic product and faces bond redemptions of about 8 billion euros on both April 20 and May 19.
With Ireland forcing public workers to accept pay cuts of as much as 10 percent to meet EU budget rules, Merkel and other leaders are trying convince voters that Greece won’t get an easy escape after a decade of fiscal profligacy.
“This is not money for free,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-area finance ministers. “This is a strong commitment imposed on Greece.”
The Greek deficit soared to 12.7 percent of GDP last year and the government has promised to cut it below the EU’s 3 percent limit by 2012.
The test will be to attach conditions to support that are strong enough to “create an incentive for the Greeks to solve their economic problems themselves,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “If vague conditions are set forth, Greece and potentially other peripheral countries might require support on a permanent basis.”
Account Fudge
After fudging its accounts to win entry into the euro a decade ago, Greece, representing 2.7 percent of the euro-area’s $13 trillion economy, posted the highest deficit in the currency’s history last year.
Prime Minister George Papandreou now has to face down striking workers that paralyzed Athens this week as he cuts public-sector wages, trims welfare provisions and raises taxes. The International Monetary Fund and European Central Bank have been charged with scrutinizing the country’s progress.
“We have lost a part of our sovereignty because of this loss of credibility,” Papandreou told reporters yesterday. “We are determined to regain this lost credibility. We will do anything necessary.”
With the Greek crisis testing Europe’s ability to run a common currency with 16 separate national fiscal policies, leaders want to avoid Paulson’s fate. In July 2008, he won power from Congress enabling a government rescue of Freddie Mac and Fannie Mae, calling it a “bazooka in your pocket” that would make a bailout less likely.
Markets soon tested the pledge and the government seized control of the mortgage lenders two months later.
--With assistance from Gregory Viscusi, Frances Robinson, Ewa Krukowska, Meera Louis, Jonathan Stearns, Andrew Davis and Robert Hutton in Brussels, Simone Meier in Dublin and Emma Ross- Thomas in Madrid. Editor: John Fraher
To contact the reporters on this story: Simon Kennedy in Brussels at +33-704-87719 or skennedy4@bloomberg.net James G. Neuger in Brussels at +32-2-285-4300, or jneuger@bloomberg.net
To contact the editor responsible for this story: John Fraher at +44-207-673-2058, or jfraher@bloomberg.net
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