Germany Demands on Greek Aid Hamper Agreement on Bailout Plan

April 10 (Bloomberg) -- German resistance to subsidizing emergency loans for Greece may hold up efforts by the European Union to reach agreement on terms of a proposed financial lifeline for the debt-strapped nation.

As officials in Brussels hammered out details to a framework for joint EU-International Monetary Fund aid, Germany restated its opposition to below-market rate loans. Greek Prime Minister George Papandreou says without the subsidies Greece can’t cut the EU’s-biggest budget deficit.

“Germany is hung up on saying this rescue would be at market prices, which is self-defeating because market prices reflect the uncertainty and then you value the uncertainty and you push Greece into a death circle,” billionaire investor George Soros said yesterday in a Bloomberg Television interview.

The wrangling came amid mounting speculation among economists that a bailout was imminent. UBS AG said it could come as soon as this weekend as Fitch Ratings cut Greece’s debt rating yesterday to BBB-, the same level as Bulgaria and Panama, and just one level above junk status. Fitch said the lack of agreement on the aid package is eroding confidence in Greece.

“The lack of clarity regarding the mechanism for timely external financial support may have hindered Greece’s access to market finance at affordable cost and hence further undermined confidence in the capacity of the government to meet its fiscal targets,” Fitch said in an e-mailed statement.

Greek Yields

European Central Bank President Jean-Claude Trichet suggested April 8 that EU countries could extend loans to Greece at their own cost of borrowing. Yields on Greek 10-year bonds reached 7.5 percent April 8, more than double what Germany pays.

German Chancellor Angela Merkel’s government rejected Trichet’s approach and reiterated her view that Greece doesn’t need aid.

“A certain rate close to the market would be foreseen in any decision,” German Finance Ministry spokesman Michael Offer said yesterday in Berlin.

Her position remains that the government in Athens can solve its financial problems on its own, Offer said. Still, the cost of financing Greek debt has surged on concern it will fail to narrow the shortfall. Greek Finance Minister George Papaconstantinou said yesterday that Greek wasn’t seeking EU aid and would make good on its pledge to trim its deficit from about 13 percent last year, more than 4 times the EU limit, to 8.7 percent this year.

Moving ‘Quickly’

While Germany still considers Greece’s deficit-cutting plan feasible, a rescue involving the IMF and bilateral EU loans would be activated “quickly” if needed, Offer said.

The financial lifeline stems from a March compromise in which Merkel pushed for the IMF’s involvement over the opposition of counterparts such as Spain’s Jose Luis Rodriguez Zapatero.

Merkel has balked at putting taxpayer funds at risk in Greece, signaling that any assistance would have to be attached to strict conditions. Merkel’s coalition has slumped in opinion polls since her September re-election. That threatens to cost her Christian Democrats and their Free Democrat coalition partner their hold on Germany’s most populous state, North Rhine-Westphalia, in regional elections on May 9.

Greece will need to seek emergency funding to make bond payments and cover debt refinancing of more than 20 billion euros ($27 billion) in the next two months, UBS economists estimate. The premium investors demand to buy Greek 10-year bonds instead of German bunds jumped to 442 basis points on April 9, the highest since the introduction of the euro. That spread narrowed to 398 basis points yesterday on signs that a bailout might be nearer.