Debt inspectors in Athens; Greece auctions T-bills

[May 10, 2011]  ATHENS, Greece (AP) -- Greece's international debt inspectors were arriving in Athens Tuesday, as the financially stricken country raised euro1.625 billion from the sale of short-term debt, a day ahead of another planned general strike.

The heads of delegations from the European Central Bank, International Monetary Fund and European Commission are set to complete their inspection of Greece's efforts to reform its economy over the coming week or two. If they say Greece is meeting its criteria, then the country will be able to receive the fifth batch of bailout loans from a euro110 billion rescue package.

The bailout loans from the IMF and other European Union countries that use the euro saved Greece from the brink of default a year ago. In return, the country has been implementing a strict austerity package, including public sector salary and pension cuts, increased taxes, opening up professions to more competition and overhauling the pension system.

But concerns have increased sharply in recent weeks over the government's ability to successfully implement the reforms as promised, or achieve its initial aim of returning to the long-term debt market next year, when the bailout loans alone will not be enough to service its debt.

Revenues have lagged behind targets as the government finds itself struggling to raise money through increased taxes in a country in recession. Another nationwide general strike Wednesday called by trade unions is unlikely to ease market tensions that Greece can get a handle on its debts.

Meanwhile, there are signs of tension within government, after Health Minister Andreas Loverdos implied Monday that some ministers were reluctant to implement reforms demanded in return for the bailout package, and that he felt he had no place in a government of "nebulous and contradictory policies."

His comment that he was putting himself "at the prime minister's disposal" led to rumours of an imminent resignation -- later shot down by government spokesman Giorgos Petalotis, who said there was no question of Loverdos quitting.

The opposition conservatives said the minister's comments were a confession "of the total failure of the government which he himself is part of."

Amid the political wrangling, Papandreou was to meet the president early Tuesday afternoon, and later hold a Cabinet meeting.

Many analysts have argued Greece's mountainous debt of more than euro340 billion combined with a deficit of 10.5 percent of gross domestic product in 2010 means the country will eventually have to restructure its debts in one way or another.

But opinions diverge significantly as to whether this would be the right course of action.

The government and EU politicians have insisted repeatedly that a restructuring is not on the cards, and would lead to more problems than it would solve.

"Default or debt restructuring is a dramatic economic and social event for the country which experiences it -- I would call it political 'suicide' -- which leads many into poverty, as experience has shown," said ECB Executive Board member Lorenzo Bini Smaghi. "It is thus rather peculiar for policymakers to design policies mainly with the aim of punishing (or rewarding) certain categories of investors, rather than considering the ultimate consequences for the people."

Smaghi said markets sometimes "have perverse incentives," with large investors who have bought insurance against default standing to benefit if there is a default and therefore lobby in favor of it.

The ECB's chief economist, Juergen Stark, also said restructuring would not solve Greece's problems.

"A debt restructuring is not the solution of the problems Greece has to overcome. Greece has to tackle structural problems and must get its budget under control," he said on German public radio Bayern 2 on Tuesday.

"If you talk about a restructuring, you also have to talk about the consequences on the financial system, on the refinancing by the European Central Bank and the consequences for its economic output," he added.

Stark maintained that Greece is "not bankrupt" and that the adjustment program agreed to a year ago will eventually prove the correct medicine for the country.

"It is a realistic program that has to be implemented," he said.

With a lack of investor confidence sending the country's borrowing costs on the international markets to dizzying heights -- the interest rate on the 10-year bond stands at more than 15 percent -- the only market realistically left open to Greece at the moment is the short-term one.

Athens raised euro1.625 billion ($2.34 billion) in 26-week treasury bills Tuesday, at a 4.88 percent interest rate -- slightly above the 4.80 percent at a similar auction in April, the Public Debt Management Agency said. The sale was 3.58 times oversubscribed, compared with 3.81 times in April. The agency had originally been seeking to raise euro1.25 billion.

The auction came a day after the Standard & Poor's rating agency downgraded the country's credit rating to B from BB- -- pushing it further into junk status. It said Greece might eventually have to resort to a partial default, reneging on as much as 50 percent of its debt.

The government said the S&P downgrade was "not justified" and based largely on "market rumors and press reports."

Moody's, another ratings agency, also said it had placed Greece's credit rating on review for a further possible downgrade.

[Associated Press; By ELENA BECATOROS]

Juergen Baetz in Berlin contributed.

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