Greeks hold crunch austerity talks amid aid threat

Reuters

By George Georgiopoulos

ATHENS (Reuters) - Greece's prime minister held talks with opposition leaders on Friday in a last-ditch attempt to win their support for more austerity and free up EU/IMF aid needed to avert a debt default.

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Financial markets were spooked on Thursday when Jean-Claude Juncker, who chairs meetings of euro zone finance ministers, warned that the International Monetary Fund could withhold its contribution to a 12 billion euro aid tranche Greece needs next month to service its massive debt mountain.

But the spread between Greek 10-year bonds and German benchmarks edged back below the 14 percent mark on Friday, suggesting some hope that a compromise could be sealed.

Analysts say if debt markets were pricing in a Greek default, they would have reacted considerably more violently.

"This is not a done deal but we can see a scenario in which the stars align," Jacques Cailloux, a European economist at RBS in London, told Reuters.

"Obviously there are risks, there is a lot of noise from people who are not decision makers. It feels like it's going in the right direction though. There is not much choice. The alternatives to further aid to Greece are all sub-optimal."

Greek Prime Minister George Papandreou's socialists enjoy a comfortable majority in parliament but EU policymakers are demanding that Athens secure broad political backing for new debt-cutting measures if they are to provide extra cash to plug a 27 billion euro funding gap next year.

Conservative opposition leader Antonis Samaras has vowed to fight the policies and Papandreou also faces resistance from members of his own party and powerful unions.

Without a credible political consensus, EU aid guarantees for next year are unlikely. Failing assurances from Europe on Greece's 2012 funding needs, the IMF is resisting payout of its 3.3 billion euro slice of the June tranche.

Greece's finance minister has warned that without the new funds, the country -- which faces a 13.4 billion euros funding crunch soon -- would be unable to meet its obligations and would default.

BRINKMANSHIP?

Speaking at a conference in Luxembourg on Thursday, Juncker had warned that European countries could not be counted on to step up and fill the gap left by the IMF if it decided against releasing its portion of the June aid tranche.

"That won't work because in certain parliaments -- Germany, Finland and the Netherlands and others, too -- there is no preparedness to do so," he said.

Some analysts saw Juncker's comments as an act of brinkmanship to press Greek political leaders to form a consensus on austerity measures, revenue increases and privatizations designed to get the country's 2010 bailout program back on track.

But they also appeared to reflect a tug-of-war between the global lender and major EU creditors, led by Germany, over a further multibillion-euro aid package for Athens.

A mission of the so-called troika -- European Commission, European Central Bank and IMF -- is currently in Greece and assessing how sustainable its debts are.

At roughly 330 billion euros, or 150 percent of gross domestic product (GDP), many economists believe the country's debt will inevitably have to be restructured eventually.

European policymakers have promised that they will not consider a coercive restructuring that hits private holders of the debt before 2013 and appetite for a "voluntary" maturity extension before then appears to be fading.

All three major ratings agencies have said adjusting debt maturities would be considered a default-like "credit event," triggering a chain reaction of consequences for Greece's credit rating, Greek commercial banks and companies, and potentially other euro zone sovereigns.

European Central Bank Governing Council member Mark Kranjec of Slovenia said on Friday that there should be no talk of a Greek restructuring until the country had balanced its budget.

The comments echoed those made by German Chancellor Angela Merkel earlier this week, in which she said Greece must be given time to return to a primary surplus.

(Writing by Noah Barkin, editing by Mike Peacock)