THE EUROPEAN Commission is preparing to deliver a downbeat assessment of Greece’s economic prospects in a forecast due on Friday, intensifying pressure on the ailing country amid expectation that it will need a second bailout.
With European finance ministers set to review the European Union/International Monetary Fund package at their monthly meetings next week, Greece suffered a further blow yesterday when Standard Poor’s cut its credit rating.
The country has come under renewed pressure since news leaked about a “secret” meeting last Friday night in Luxembourg, at which Europe’s most powerful finance ministers gathered to discuss its plight.
In attendance were the German, French, Italian, Spanish and Greek ministers, as well as euro group chief Jean-Claude Juncker and European Central Bank chief Jean-Claude Trichet.
Confusion over the objectives of the Luxembourg meeting – branded a “communications disaster” at the highest levels in Brussels – came as Athens and Berlin tried to dismiss a German report that Greece was examining whether to leave the euro zone.
The report in the online edition of Der Spiegel prompted consternation in Brussels, as diplomats warned that the only way out of the single currency was to leave the EU itself.
Top euro zone officials have ruled out any debt restructuring for Greece as they are afraid it would lead to contagion in the euro zone as markets weigh the prospect of a similar move by other vulnerable countries.
The publication of the commission’s spring economic forecast comes amid an ongoing review of the bailout by the EU/IMF “troika”, comprising the commission, the European Central Bank and the IMF.
Although the troika review may not reach its conclusion before a new forecast appears, officials familiar with the Greek rescue programme are increasingly gloomy about the country’s prospects of making its return to markets next year. The country’s existing plan, agreed a year ago, assumes it will be able to tap the markets for €25 billion to €30 billion as it gradually regains market confidence. However, market investors are taking an increasingly dim view of the bailout.
Mounting anxiety that Greece will have to restructure its debt – with longer maturities or “haircuts” on its liabilities – has seen investors demand crippling interest rates to hold its bonds. The annual yield on bonds with a five-year maturity rose yesterday to about 22 per cent.
SP said its decision to slash its rating on Greek debt reflected the likelihood that the country’s European sponsors would want private holders of its debt to accept later repayment.
The agency added that any haircuts of some 50 per cent or more of the original value of the country’s debt may be needed to make Greece’s debt burden sustainable.
“In our view, there is increased risk that Greece will take steps to restructure the terms of its commercial debt, including its previously issued government bonds,” SP said.
Greece criticised the downgrade, saying SP’s analysis was seriously flawed because it was based on rumour. “Credit rating decisions should be based on objective data, policymakers’ announcements and realistic assessments of the conditions facing an economy. Not on market rumours and press reports,” the finance ministry in Athens said.