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Papandreou Faces Bond Rout as Budget Worsens, Workers Strike


George Papandreou, Greece's prime minister

Protestors throw objects at Greek police during protests

Protestors stand in front of the Greek Parliament today

April 21 (Bloomberg) -- Arnab Das, head of global market research at Roubini Global Economics, talks with Bloomberg’s Margaret Brennan about the outlook for Greece to activate an emergency aid package before negotiations on the conditions for the loans conclude. Talks between Greece and officials from the euro region, the International Monetary Fund and the European Central Bank on the emergency aid began today in Athens.

April 22 (Bloomberg) -- Greek bond yields surged to the highest since 1998 as the country’s worsening budget outlook put pressure on the government to accept a European Union bailout and ignore street protests against its austerity measures.

Greece’s benchmark 10-year bond yield rose to 8.564 percent, almost triple the rate on bunds. As a civil servant strike closed hospitals and shut the 2,500-year-old Parthenon temple, the EU said today that Greece’s deficit in 2009 was worse than previously forecast. EU officials lifted their estimate to 13.6 percent of gross domestic product from 12.7 percent and said it could top 14 percent.

Prime Minister George Papandreou is under fire from voters who say his budget cuts have gone too far and from investors who argue that further action is needed to reduce a deficit that is four times bigger than European Union rules allow. As Greek lawmakers meet EU and International Monetary Fund officials to negotiate loan conditions, the premium investors demand to hold Greek debt over German bonds reached 522 basis points.

“Papandreou is caught between a rock and a hard place,” said Jacques Cailloux, chief European Economist at Royal Bank of Scotland Group Plc. “The market has zero confidence in what the Greeks are saying, and any further austerity measures pushed for by the IMF could be the ones that break the camel’s back if they are deemed unfair by the population. He doesn’t have any option though.”

Markets Suffer

The Greek government said it still plans to cut the deficit by 4 percentage points this year, though it backed away from a forecast that the shortfall would fall to 8.7 percent. An EU official said the bloc has always aimed for a 4 percentage point cut in the budget gap this year.

Greek stocks declined for a second day today with the benchmark ASE Index falling 2.4 percent to 1,890.21, leaving it down 14 percent on the year. Greece’s two-year bonds now yield more than the 10-year debt, indicating investors don’t believe the EU bailout plan will be enough to sustain Greece. Credit- default swaps to insure against a default in the coming year leaped 104 basis points to a record 744.7.

More than 500,000 workers were called on to strike, according to the unions organizing the walkout. Today’s strike isn’t expected to affect public transport or plane travel, after air-traffic controllers postponed a planned walkout to clear a backlog of flights caused by the spread of volcanic ash from Iceland across Europe.

Embracing IMF

Greek officials yesterday began talks on activating a 45 billion-euro ($60 billion) emergency aid package, with 9 out of 10 people surveyed in an opinion poll in Eleftheros Typos expecting the IMF to insist on more belt-tightening measures.

The main opposition party, the center-right New Democracy, said Papandreou is responsible for driving the country into the IMF’s arms. Dimitris Papadimoulis, a lawmaker for the Syriza left coalition group, said in parliament yesterday the IMF’s involvement hangs “like a cloud of volcanic ash over Greeks.”

“They feel that for years now the prime minister will be Dominique Strauss-Kahn,” he said, referring to the IMF’s managing director.

The IMF is likely to try to impose tougher conditions than the deficit-reduction measures devised by the Papandreou government. Serious resistance to IMF demands could endanger future loans, said Erik F. Nielsen, chief European economist at Goldman Sachs in London.

Debt Restructuring

“If this becomes a major issue, then I suspect that the IMF might settle for a smaller and shorter program to help them through the May payments, but for investors this ought to be a major concern,” he wrote in an e-mail to investors.

Nielsen said the government might even be forced to offer a voluntary debt-restructuring arrangement sometime over the next few months in combination with the aid package.

Some European officials say that national strikes highlight the challenge facing the Greek government in coming years. In a briefing to German lawmakers on April 19, Bundesbank President Axel Weber cited television footage of Greek demonstrators as showing how sections of the population fail to appreciate the situation their debt-laden country is in. His comments were cited by two lawmakers who were present.

PAME Hellas, a union affiliated with the Greek Communist Party, called its own labor action. Its members blockaded entry to the port of Piraeus yesterday, preventing ferries from sailing. Others picketed luxury hotels in the city center, including at least one where IMF negotiators are staying.

Slaughter

“We must dare, otherwise we will be led like lambs to the slaughter,” said Aleka Papariga, head of the Communist Party of Greece, the third-largest parliamentary party. “Working people aren’t about to be used to allow passage of policies that will bring the worst barbarity we’ve seen in the past 35 years.”

Papandreou’s government still needs to raise about 8.5 billion euros before the end of May. While Finance Minister George Papaconstantinou says he’s “not influenced” by the surge in bond yields, investors are skeptical he can maintain momentum to cut the budget shortfall to less than 3 percent in 2012.

The EU today said the 2009 deficit could be revised as much as 0.5 percentage point higher because of “uncertainties on the surplus of social security funds for 2009, on the classification of some public entities and on the recording of off-market swaps.”

The yield on Greece’s 10-year government bond has surged more than 100 basis points since April 12, the first day of trading after the EU said it was prepared to offer Greece loans for three years at 5 percent. The spread on German bunds is the highest since the euro was started in 1999.

“Greek policymakers are steering an extremely perilous course between investors asking for a quick and tough IMF program, and public opinion opposed to further adjustment,” said Marco Annunziata, chief economist at UniCredit Group in London. “It’s an almost impossible task, especially with time quickly running out.”

To contact the reporter on this story: Maria Petrakis in Athens at mpetrakis@bloomberg.net

To contact the editor responsible for this story: Hellmuth Tromm at htromm@bloomberg.net

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