EUROPEAN COMMISSION chief José Manuel Barroso has said the turmoil in Greece presents “risks” to Ireland’s effort to return to the debt markets next year as foreseen in its bailout programme.
Greek prime minister George Papandreou is facing resistance within his own government to a new austerity plan, stoking anxiety in Dublin that contagion from the country may disrupt the Government’s plan to make its return to private investors in 2012.
Mr Barosso was asked about the potential for the situation in Greece to threaten Ireland’s plan to regain market financing at a briefing of reporters at the European Parliament in Strasbourg. He said the authorities had acknowledged from the outset all countries were interdependent.
“We have seen in the past the fact that sometimes the markets react, not only to a situation in one country, but they make some kind of generalisation and so in fact some risks exist,” he said.
This was an additional reason to work with Greece so that it went ahead with necessary reforms and its fiscal consolidation plan. “We are asking not only Greece to make and conclude its work but also the member states in a collective way, to show solidarity and responsibility to try to avoid any ill-effect of contagion because we have seen in the past that sometimes the markets, they make this kind of contamination or association. So that is one of the reasons why we have to look at these challenges at national level but also trying to grasp the system effects.”
Mr Barroso was speaking as the commission said in a new report the Government’s implementation of the reforms in the EU-International Monetary Fund bailout plan were on track.
The assessment of the Government’s execution of the bailout was the commission’s first under a new review system in which it examines draft annual budgets from member states early in the budget cycle. The Irish draft reflects the Government’s commitments under the bailout.
In the same cycle of reviews, the commission warned the growth projections of Spain and France were overoptimistic and said Belgium and Austria should make deeper cuts. In spite of its positive assessment, the commission warned the Irish public finances were in a vulnerable position.
“Ireland appears to be at high risk with regard to the long-term sustainability of public finances,” it said. “Achieving sufficient primary surpluses over the medium term and further reforming the Irish social security system would be necessary to improve the sustainability of public finances.”
On Ireland’s campaign for a cut in the interest rate on its bailout loans, EU economics commissioner Olli Rehn said the cost of the rescue should be based on an assessment of debt sustainability rather than moral hazard.
“It is important that we can have some kind of interest rates in these programmes that facilitate that the countries will be able to pay back their debts and reduce their debt burdens,” he told reporters. “Therefore we see that it makes sense to have the same kind of reduction for Ireland as for Greece, for Portugal, in the programme just agreed.
“That remains to be decided in the European Council or in a council formation and it requires unanimity of all member states. We have just concluded the reduction of the interest rate for Greece . . . That is a good benchmark also for Ireland.”
GREEK SOVEREIGN DEBT CRISIS: VOLUNTARY ROLLOVER PLAN
THE EUROPEAN Central Bank has indicated it will accept a voluntary rollover of Greek sovereign debt as part of the solution to the crisis over the country’s debts.
The ECB is a significant holder of Greek debt as a result of its market interventions and opposes any form of default. But remarks made in Montreal late on Monday by Jean-Claude Trichet suggest support for a compromise deal in which private sector creditors will shoulder some of the burden of the second Greek rescue in two years by rolling over existing debt.
Officials view the private sector debt rollover, in which investors would voluntarily maintain their exposure to Greece by purchasing fresh bonds as existing ones matured, as an important aspect of the new bailout, because it would help donor governments justify fresh aid for Greece to taxpayers. But big problems with the rollover remain to be resolved.
European economic and monetary affairs commissioner Olli Rehn, speaking to the finance committee of the European Parliament on Monday, said the package would be ready “in the next few weeks, before June 20th”, when euro zone finance ministers meet in Luxembourg.
That deadline would permit EU leaders to sign off on the new bailout at a summit in Brussels on June 23rd and 24th.
ECB governing council member Lorenzo Bini-Smaghi also expressed unease with the idea of a rollover in Berlin on Monday, saying it would be hard to carry out in practice. Any Greek rollover is likely to involve investors in two- or three-year Greek treasury notes buying bonds of seven years or longer.
To persuade investors to participate, officials are looking at the idea of offering some sort of insurance or guarantee with the new debt.
However, that might provoke legal objections because it could result in the subordination of old debt and be regarded as coercion of bondholders, sources said.
Another option under study is offering Greek privatisation receipts as security for the new bonds, or at least collateralising them with state assets, one source said.
But even if most of Greece’s private sector creditors – largely German and French banks – can ultimately be convinced that a rollover is worth their while, it is likely to take a lot longer than two weeks to secure their involvement. So this aspect of the new Greek bailout may remain partly unresolved if governments approve the package late this month.
– ARTHUR BEESLEY
(Additional reporting: Reuters)
