March 22 (Bloomberg) -- German Chancellor Angela Merkel told investors they shouldn’t expect this week’s European Union summit to agree on assistance for Greece, resisting calls for the specifics of a rescue plan and helping send Greek bonds to their lowest in more than three weeks.
EU leaders must not create “illusions” for markets by building expectations for Greek aid, she said in an interview with Deutschlandfunk radio yesterday. Her remarks came after Greek Prime Minister George Papandreou and European Commission President Jose Barroso said the EU should spell out its aid measures at the March 25-26 summit in Brussels.
“The differences of opinion remain too great to expect concrete financial support” at this week’s summit, Erik Nielsen, chief European economist in London at Goldman Sachs Group Inc. wrote in a note to investors yesterday. “I think we have another month or so to go before we have clarity.”
Greek 10-year bonds fell to their lowest since Feb. 25, with yields rising by 11 basis points to 6.46 percent, according to Bloomberg generic yields. The risk premium investors demand to hold Greek securities over comparable German bonds widened for a third day by 13 basis points to 337 basis points.
Borrowing Costs
Papandreou is urging EU allies to announce a package that will help him steer the country’s borrowing costs lower and avoid the need for a bailout. Merkel last week signaled Greece might have to turn to the International Monetary Fund for any emergency finance, a shift that put her at odds with French President Nicolas Sarkozy and other backers of a European solution to the Greek budget crisis.
“The uncertainty over who will provide Greece with funds is extremely high and this is unlikely to support Greek debt,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich.
The euro, which has dropped 10 percent in the past four months, was little changed at $1.3515 at 1:30 p.m. in Berlin.
Papandreou, who says current borrowing costs are unsustainable, is looking for help as 20 billion euros ($27 billion) of Greek debt matures over the next two months. Speaking to members of his governing Pasok party in Thessaloniki on March 20, he said the EU should place “the gun on the table, so that the speculators can leave us at peace.”
Barroso ‘Hopeful’
Barroso is pushing EU leaders to reach a deal on Greek aid at the meeting this week and is “hopeful” about an agreement, commission spokeswoman Pia Ahrenkilde Hansen told reporters in Brussels today. He was “not disappointed” by Merkel’s remarks, Hansen said.
Underscoring the urgency of the crisis, Merkel spoke by phone with Papandreou yesterday, the German government said in an e-mailed statement. He reiterated that Greece doesn’t currently require financial assistance.
“Greece isn’t insolvent and therefore the question about assistance isn’t the one we need to be talking about now,” Merkel said in the interview yesterday. “We always talk about the so-called markets that always respond to signals. I think it’s important that we don’t create illusions.”
Papandreou has said he may turn to the IMF to overcome the crisis if EU leaders fail to agree on a lending facility, a move opposed by Sarkozy and European Central Bank President Jean- Claude Trichet, partly because it would show the euro region can’t solve its own crises.
Bond Sales
After raising funds this month and in January, Greece still needs to sell about 10 billion euros of debt to finance the bonds that are maturing in April and May. Papandreou said in a speech on March 19 that the country was one step away from not being able to borrow.
Merkel rejected speculation that Germany had given up any support for an EU-led solution in favor of the IMF, telling Deutschlandfunk that no decision has been made yet.
“I remain very explicitly open” to either option should the circumstance arise, Merkel said. Sixty-one percent of Germans are opposed to their government giving money to Greece, the Financial Times said today, citing an FT/Harris poll.
Barroso urged Merkel, whose government is the biggest contributor to the EU budget, to set aside domestic concerns, saying in an interview in Handelsblatt that support for Greece was in Germany’s interest.
‘Superficial’ Solidarity
Merkel signaled that greater budget discipline was the price for her supporting aid to Greece, denouncing what she called “superficial” solidarity. Speaking to members of her Christian Democratic Union two days ago, Merkel lauded the austerity package announced by Papandreou this month to cut the deficit to 8.7 percent of gross domestic product from 12.7 percent last year.
“There has to be solidarity that tackles the problem at its roots, not solidarity that’s superficial and in the end weakens everybody,” Merkel said at a rally in Muenster in the western state of North Rhine-Westphalia. Germany’s most-populous state holds regional elections in May.
The government also sought to quell reports about divisions between Merkel and her finance minister, Wolfgang Schaeuble, who has “great reservations” about the IMF option. It denied a report in Der Spiegel magazine that Schaeuble ordered his staff not to communicate with chancellery aides without his consent.
Schaeuble told newspaper Bild am Sonntag yesterday that EU assistance would take place only “in the most extreme circumstances” and said the IMF was an option too.
To contact the reporter on this story: Patrick Donahue in Berlin at at pdonahue1@bloomberg.net
