EU eyes lower rates for Greece, Ireland amid chaos

Reuters

By John O'Donnell and Stephen Brown

BRUSSELS/BERLIN | Mon May 9, 2011 6:45am EDT
 

The European Union is looking to lower interest rates on bailout loans to Greece and Ireland and is working on a second rescue for Athens in a chaotic effort to prevent a disorderly debt restructuring.

The executive European Commission said on Monday it hoped to see a decision within weeks on reducing the rate charged to Ireland to make Dublin's debt more sustainable.
"The Commission is clearly in favor of a rate cut," a spokesman for EU Economic and Monetary Affairs Commissioner Olli Rehn said. "The Commission is against debt restructuring."

The new Irish government's bid for lower interest payments has so far been blocked by Germany and France, which want Dublin to drop its veto on harmonizing the corporate tax base in Europe in exchange or raise its own low corporate tax rate.

In Germany, a senior lawmaker in Chancellor Angela Merkel's conservative party said a further cut in the rate on emergency loans to Greece, already reduced by one percentage point in March, would be justified if it carried out further reforms to reduce its debt risk.

Michael Meister, finance policy spokesman of Merkel's Christian Democrats, told German radio he opposed any idea that Athens should restructure its debt or that it should consider leaving the euro zone.
However, German Finance Ministry spokesman Martin Kotthaus told a news conference: "There is no discussion at the moment about extending the payment schedule or lowering the interest rates for Greece.

The calls for lower interest rates came after a select group of top euro zone policymakers held not-so-secret talks in Luxembourg on Friday evening on how to stem the currency bloc's deepening sovereign debt crisis.

The cost of insuring Greek, Irish and Portuguese debt against default rose further on Monday as market jitters intensified over the risk that Greece may have to restructure its debt, forcing investors to take losses.

European shares fell amid signs the three euro zone states in intensive care are staging a bidding war for easier terms by pointing to concessions made to each other.

The jitters also followed a report by German magazine Der Spiegel alleging that Greece was considering leaving the euro zone, which drew indignant denials from Athens and EU ministers.

MERKEL TO MEET EU TOP BRASS

A German government spokesman said Merkel would meet European Commission President Jose Manuel Barroso, head of the EU's executive arm, and European Council President Herman van Rompuy, who chairs the bloc's regular summits, on Wednesday to review the situation.

A Greek exit from the euro had never been under discussion and was not now, he told a news
conference.

Euro zone and EU finance ministers are due to meet next week to approve Portugal's aid program amid lingering uncertainty over whether Finland, which has a caretaker government and has not yet begun negotiations for a new coalition, will be in a position to give the required agreement.

Pressure is mounting for those meetings to deliver decisions on Ireland and Greece as well.

Responding to anger in some countries that were not invited to Friday's talks, a German Finance Ministry spokesman insisted there was no attempt to create a two-class euro zone.
Greek Finance Minister George Papaconstantinou, who attended the Luxembourg meeting, said investors did not believe his country could return to capital markets next year as envisaged in its EU/IMF plan, so it might need alternative funding.

Jean-Claude Juncker, chairman of the Eurogroup of finance ministers of the 17-nation euro area, said after Friday's talks there was a consensus that Athens would require a second rescue.
"We think that Greece does need a further adjustment program," he said after meeting with ministers from Germany, France, Italy, Spain, the EU's Rehn and European Central Bank President Jean-Claude Trichet.

He gave no details, but a euro zone source said one idea under consideration was for the European Financial Stability Facility rescue fund to buy Greek bonds in the primary market upon issuance next year, in return for a new form of collateral.

Greece, which has a debt mountain of nearly 150 percent of gross domestic product, is supposed to raise 27 billion euros in the market in 2012, according to the existing rescue plan.

Market analysts are convinced Athens will have to reduce its debt substantially by a mixture of rescheduling maturities, lower interest rates and possibly convincing private investors to take voluntary losses to avoid a disorderly default.

Some also believe Ireland will be unable to repay its debt, set to reach 120 percent of GDP, and will face mounting political pressure to make bank bondholders share the cost.

A senior Irish minister said on Sunday that Dublin was watching to see what concessions it can win on its EU/IMF bailout if Greece is given a new deal to resolve its crisis.

Energy Minister Pat Rabbitte said he hoped Ireland would win a 1 percentage point cut in the rate it is paying on some 40 billion euros of loans from the EU at the meeting of EU finance ministers.
(additional reporting by Stephen Brown in Berlin, Dina Kyriakidou in Athens, Carmel Crimmins in

Dublin and William James in London; writing by Paul Taylor; editing by Mike Peacock)