Greece looks to convince creditors to extend aid

By Elena Becatoros

Associated Press

Published: Tuesday, Sept. 20 2011 8:10 a.m. MDT

A public sector trade union member shouts slogans outside the Greek finance ministry, right, during a protest against the government's plans to suspend public servants on reduced pay, in Athens, Tuesday, Sept. 20, 2011. Greece is under pressure from international rescue creditors to slash state payroll costs as part of its deficit-reduction targets need to receive continued emergency financing.

Thanassis Stavrakis, Associated Press

ATHENS, Greece — Seeking to prevent a potentially disastrous default next month, Greece is to hold a second round of negotiations with international creditors late Tuesday to secure a crucial installment of bailout loans.

Finance Minister Evangelos Venizelos will aim to convince officials from the European Commission, International Monetary Fund and European Central Bank, collectively known as the troika, in a teleconference that the country is doing what it can to meet strict budget targets promised in return for the rescue funds.

Markets are fairly hopeful that Greece will do enough to receive the €8 billion ($10.9 billion) and avoid a default next month that could plunge Europe's banking system into turmoil. Stocks across Europe and the euro were trading higher, brushing aside the latest downgrade of Italy's credit rating downgrade from Standard & Poor's.

Most analysts nevertheless think the country will have to restructure its debts at some point, especially if the economy remains mired in recession.

Fitch Ratings said in a report Tuesday that it still expected Greece to eventually default, but to do so while remaining in the eurozone.

"The failure to deal decisively with Greece continues to erode confidence in the capacity of European institutions and policymakers to manage the broader crisis," it said, adding that as reflected in its ratings, "Fitch expects Greece to default but not to leave the eurozone."

Market turmoil was fed last week by statements from elected officials in German Chancellor Angela Merkel's coalition speculating either about a Greek default or even its depature from the eurozone. Merkel has tried to quell the fears by insisting no default can take place until 2013, when it would be allowed under the permanent eurozone bailout fund, the European Stability Mechanism.

Lars Feld, a member of an economic council advising the German government and a professor at the University of Freiburg, told the Frankfurter Rundschau newspaper that Greece was unable to repay its debts and should restructure them by paying bondholders less than they are owed.

Feld said that could be done by having the temporary European Financial Stability Facility bailout fund take Greek bonds at a 50 percent knockdown in return for EFSF bonds.

"Greece is insolvent, in the sense that its public finances are no longer sustainable... The austerity program is unavoidable, but at the same time it chokes off growth and makes the debt situation worse," the paper quoted him as saying.

Since May 2010, Greece has been dependent on a €110 billion ($150 billion) bailout from other eurozone countries and the IMF to continue servicing its debt and to pay salaries and pensions. Without the next installment, the country only has enough funds to see it through mid-October.

The funds had been expected in September, but the country's creditors have said a decision on whether to disburse the funds will not be made until early October.

A first teleconference between Venizelos and the troika Monday night was "productive and substantive," the Finance Ministry said.

Inspectors from the IMF, ECB and Commission suspended their quarterly review of the country's progress earlier this month, amid talk of missed targets and delayed implementation of reforms.

The Socialist government has already taken a series of austerity measures, cutting public sector pay and pensions and hiking taxes. Unions have responded with strikes and demonstrations.

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