Greece neared a deal with the EU and IMF to avert a near-term default, pushing the euro to a one-month high today, but a poor debt auction in Portugal and Spanish wage talk troubles highlighted the risks of contagion.
Sources close to talks between Athens and inspectors from the European Commission, European Central Bank and International Monetary Fund (IMF), said they expected the latest review of Greece's fiscal progress to be completed by Friday.
One Greek official involved in the discussions expressed optimism that the so-called troika would release the €12 billion tranche Greece needs to cover its short-term funding needs.
"There will be a way for the disbursement of the fifth instalment to be approved," the official said, requesting anonymity. "The negotiations with the troika will be concluded today or tomorrow, the latest by Friday."
The German finance ministry played down concerns that the IMF might baulk at releasing its share of the aid and leave Europe scrambling to make up the difference.
IMF officials had warned over the past week that they would not pay up unless Greece's 2012 funding gap was addressed, forcing euro zone governments to come up with a broader financing plan.
"Everyone seems to be converging slowly but surely towards a consensus which is likely to involve a mix of additional aid, more austerity and some private sector involvement," said Gilles Moec, an economist at Deutsche Bank in London.
The reassuring signals helped the euro push up to a four-week peak against the dollar, which was further undermined by weak US jobs data.
In a reminder of the ongoing challenges faced by the 17-nation currency region roughly 18 months after its debt crisis erupted, Portugal saw its short-term borrowing costs spike higher in a bill auction and data showed manufacturing weakness.
The country, which agreed to a €78 billion EU-IMF bailout last month and received its first tranche today, sold €850 million in four-month T-bills at an average yield of 4.967 per cent, more than 30 basis points above what it paid for three-month paper less than a month ago.
A reform of rules governing wage agreements would be one way to reassure markets and Spain's peers that it is serious about boosting productivity levels that are among the lowest in the euro zone. The government has warned it will push through the reforms unilaterally by June 10th if no deal is possible by then.
Ireland, the other country alongside Greece and Portugal to receive a bailout, received some good news overnight when Standard & Poor's said it believed the country had a good chance of returning to the capital markets next year to raise long-term funding.
But Greece remains a major worry and even a deal to tide it over through the end of 2013 is unlikely to assuage concerns that it will eventually be forced into a coercive restructuring of its debt, which stood at nearly €330 billion - or close to 150 per cent of GDP - at the end of last year.
A harsh restructuring that would force losses on private creditors has been ruled out for now, but Germany and allies like Finland and the Netherlands are insisting on some sort of symbolic participation from the private sector.
Sources said that investors who hold Greek bonds that are due to mature in 2012 and 2013 will be encouraged to roll over that debt under a scheme similar to the "Vienna Initiative" used in early 2009 to safeguard banking systems in central and eastern Europe.
It is unclear what incentives governments could offer to convince investors to buy new Greek bonds, but in similar cases in the past, they have been promised higher coupons, preferred creditor status or collateral as inducements.
In addition to the private sector role, a new package for Greece - expected to total around €65 billion euros according to EU officials - could involve a mixture of collateralised loans from the EU and IMF, as well as more revenue measures.
Athens could also come under pressure to accept unprecedented intrusive external supervision of its privatisation programme, which has yet to sell anything since the €110 billion EU-IMF rescue one year ago.
While confirmation of the latest aid tranche could come soon, haggling over the shape of a second bailout package is expected to continue over the coming weeks, culminating in a summit of EU leaders in Brussels on June 24th.
Reuters
