Greece's bond auction to test resolve

The Greek flag flies in front of the Parthenon on the Acropolis on February 17, 2012 in Athens, Greece.

Story highlights

  • Greece plans to raise about €6bn of short-term funds this week from local banks
  • Comes after its eurozone partners turned down a bridge loan to repay an ECB bond
  • The bond repayment will mark the next test for Greece's economic team
  • Greece faces a looming cash crunch as a €31.2bn loan has been delayed

Greece plans to raise about €6bn of short-term funds this week from local banks after its eurozone partners turned down a request for a bridge loan to repay a bond held by the European Central Bank that matures later this month.

The ECB subsequently rejected a Greek proposal to delay the bond repayment by one month, highlighting the tough approach being taken by international lenders as Athens struggles to bring its bailout programme back on track and line up another €11.5bn of spending cuts in order to keep its place in the eurozone.

Greece faces a looming cash crunch in September as a €31.2bn loan tranche due to be disbursed in June has been delayed until European Union and International Monetary Fund officials are satisfied the proposed spending cuts are viable. The troika of EU, IMF and ECB officials are due to return to Athens at the end of this month to make a final decision.

The bond repayment will meanwhile mark the next test for Greece's economic team. "After our own suggestions were turned down, we were told that a special auction of treasury bills would be an acceptable way to pay back the bond," said a senior finance ministry official.

The ECB gave the go-ahead for the bond auction last week by raising the ceiling for Greek banks using T-bills as collateral for emergency liquidity assistance (ELA) from the country's central bank from €3.5bn to €7bn, a banking source said.

Yet the upcoming auction of six-month paper, if successful, would only partially cover the €3.2bn bond repayment due on August 20, as part of the issue would go towards rolling over existing debt held mainly by Greek banks.

The Hellenic Debt Management Agency may have to pay a significant premium over the 4.70 per cent interest rate on the previous six-month T-bill issue, one analyst said. "This is a one-off arrangement as the banks are supposed to start winding down their T-bill holdings this year under the bailout agreement," the analyst added.

Athens may also seek to tap about €3bn from a cash buffer held by the Hellenic Financial Stability Fund, a vehicle for recapitalising Greek banks under the terms of its second €174bn bailout, in order to complete the funding of the August 20 payment.

About €7.5bn of the €11.5bn in spending cuts have already been identified and accepted by the troika, but finding the remaining €4bn, equivalent to about 2 percentage points of national output, will require a fresh commitment by the leaders of the socialist and leftwing parties in the three-party governing coalition.

"We have exhausted all the fat that remains in the public sector . . . There is no alternative to reducing wages and pensions," the senior finance ministry official said.

He said the economic team still hoped to avoid across-the-board cuts, which the coalition government ruled out when it took office in June. Yet the troika has questioned whether alternative measures, such as targeted salary cuts for workers in the broader public sector, would yield the required savings.