Greece draws strong bond demand at high price
ATHENS (Reuters) - Debt-stricken Greece drew strong demand for a crucial bond issue on Thursday but paid a steep risk premium that underscored its plea to Germany and other EU partners for support to help lower its borrowing costs.
A day after the government announced draconian new austerity measures, a 5 billion euro 10-year syndicated bond was more than three times oversubscribed at a price of about 6.4 percent -- twice what Berlin pays, banking sources said.
The European Commission, the European Central Bank and EU governments praised the latest round of pay cuts, pensions freeze and tax increases designed to stem a debt crisis that has shaken the euro zone. But Greek labor unions responded angrily.
Communist trade unionists occupied the finance ministry and prevented staff entering the building, while the main private and public sector unions called a 3-hour strike for Friday, when parliament will enact the austerity package under an emergency procedure.
Athens needs to borrow 53 billion euros ($72 billion) this year -- at least 20 billion of it by end May -- to repay existing debt and cover its huge budget deficit.
"We are compensating the markets to re-enter," the country's new debt agency chief, Petros Christadoulou, told Reuters.
He said Athens aimed to bring its borrowing costs down to "levels not far wider than Ireland." Dublin's risk premium over benchmark German bonds was 115 basis points on Thursday, while the Greek spread hovered close to 300 bps.
Christadoulou said most of the new bond went to "real money" long-term investors such as pension funds, commercial banks and insurance companies, 90 percent outside Greece, rather than short-term players such as hedge funds that have been accused of speculating against Greek debt.
Prime Minister George Papandreou will meet German Chancellor Angela Merkel on Friday, looking for more explicit support to help reduce his borrowing costs, but Berlin has lowered expectations by saying financial aid is not on the table.
French Finance Minister Christine Lagarde told reporters that Paris and Berlin have been working on ways to help Greece but "it's not on the agenda at the moment."
"Of course we have worked on solutions, but we don't need to bring them out now," she said.
Greek Deputy Foreign Minister Dimitris Droutsas pleaded on German radio for more visible support to enable Greece to borrow more cheaply but insisted it did not seek direct financial aid.
"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.
Greece has said it may have to turn to the International Monetary Fund if EU assistance is not forthcoming, but an IMF spokesman said no talks were planned when Papandreou visits Washington next week.
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.
EU Economic and Monetary Affairs Commissioner Olli Rehn told Italian newspaper Corriere della Sera that the 4.8 billion euros in extra savings announced on Wednesday were sufficient for 2010 providing they were applied fully.
"But further on, in 2011 and 2012, further measures will be necessary for Greece... for medium-term consolidation," he said.
A Reuters poll on Tuesday, before the latest measures were announced, showed economists were skeptical about Greece's ability to cut its deficit this year. Only 18 of 47 respondents said they believed Athens would achieve the promised target of a reduction by four percentage points of GDP.
Even if it does, economists say risks such as a double-dip recession in the euro zone could blow Greece off course in 2011.
"The current strategy employed to deal with Greece doesn't look likely to ring-fence the Greeks successfully: in a slowdown market forces would likely breach the firewall," Michael Dicks, head of research at Barclays Wealth, said in a blog post.
The European Central Bank warmly praised Greece's third savings package in as many months but evaded questions about whether it would ease collateral rules that leave Athens at the mercy of a single further downgrade by Moody's ratings agency.
ECB President Jean-Claude Trichet said the "very convincing" new austerity measures would restore Greece's credibility in financial markets and showed that EU discipline was working. It would not be appropriate for Greece to seek an IMF standby loan, he said.
Moody's analyst Sarah Carlsson said Greece must execute their plan "perfectly" to avoid a downgrade.
(additional reporting by Angeliki Koutantou, Tatiana Fragou and Ingrid Melander in Athens, George Matlock and Jeremy Gaunt in London; writing by Paul Taylor; Editing by Patrick Graham)