Greece walks the default tightrope

GREECE’S ability to avoid default hangs in the balance as international monitors prepare to assess whether prime minister George Papandreou’s government can meet the conditions of rescue loans.

EU and IMF inspectors held a teleconference in Athens last night with finance minister Evangelos Venizelos and other officials to judge whether the government is eligible for an aid payment due next month.

The call was “productive and substantive”, the finance ministry said. The talks will continue in another teleconference tonight.

Greece is struggling to prove to its partners that it is doing enough to receive a sixth tranche of loans to prevent default. As Papandreou fights investor doubts and domestic opposition, European leaders are squabbling over the terms of the July agreement and the prospect that they will be forced to channel more money to keep Greece in the eurozone.

EU and IMF monitors suspended their review earlier this month after discovering an unexpected hole in the budget.

“We can’t move along without real implementation of fiscal reforms and we are late,” Venizelos said yesterday. “We must reach the end of December with a cash balance result that’s within fiscal targets.”

Technical discussions between the Greek government and the EU and IMF will continue today, according to Amadeu Altafaj, spokesman for European Economic and Monetary Affairs Commissioner Olli Rehn. There is no Greek cabinet meeting scheduled for today.

Venizelos said that some measures in the five-year €78 billion medium-term budget plan adopted in June may need to be brought forward to meet targets, a week after announcing a property levy to help raise €2bn.

The European Commission isn’t demanding more of Greece than was agreed to in the international aid programme for the country, Altafaj told reporters in Brussels. “The only thing that is on the table is full compliance with the agreed targets. No more, no less,” he said, adding that only after the conference call would the Commission “be in a position to communicate further on the next steps”.

Venizelos said the state has to become “smaller and smarter” and the focus in the 2012 budget will be on spending cuts. New taxes can’t be “incessantly” imposed because of the inefficiency of the tax collection system, he said.

On Sunday, German Chancellor Angela Merkel’s party lost a regional election in Berlin, the last of seven state ballots this year that have seen the coalition parties punished amid voter anger over her handling of the debt crisis.

Greece’s 10-year yield rose 183 basis points to 23%, while two-year notes added 625 basis points to 61.38%. The notes rose for the first week in two months last week as traders trimmed bets for a pending default after the leaders of Germany and France signalled a commitment to keeping Greece in the eurozone. They had climbed above 80% for the first time on September 14 amid speculation the country wouldn’t be able to meet its obligations to investors.

Stocks tumbled, halting a five-day rally in US benchmark indexes, and the euro weakened amid concern Greece will fail to qualify for more financial aid. Treasuries rose, sending two-year yields to a record low, and copper and oil slid.

The Standard & Poor’s 500 Index retreated 2% to 1,192.10 and the Stoxx Europe 600 Index closed down 2.3%.

The euro depreciated 1.2% versus the US currency and the Dollar Index rose for a second day.

Ten-year Treasury yields fell 11 basis points and the similar-maturity Greek yield jumped 183 basis points. Copper sank to a nine-month low and oil slid 3.3%.

The Greek finance minister will set out plans announced on September 6 to accelerate state asset sales and cut spending by placing civil servants in a “reserve” system and shutting down dozens of government agencies.