EU Demands Greek Cuts in Bid to Uphold Euro Stability

European leaders ordered Greece to get the bloc’s highest budget deficit under control and said they were prepared to take “determined” action to staunch the worst crisis in the euro currency’s 11-year history., Bloomberg 2/11/2010 9:58:39 AM

The agreement brokered by German Chancellor Angela Merkel, Greek Prime Minister George Papandreou, and European Central Bank President Jean-Claude Trichet, stopped short of offering concrete measures to help Greece handle a debt load that exceeds its annual economic output. Greek bonds rose and the euro fell after the deal was announced before a European Union summit.

The accord left open how the EU would respond to a fresh wave of speculative attacks against Greece or countries such as Spain and Portugal, which are also struggling to cut their budget deficits. The statement echoes prior calls for Greece to clean up its accounts and gave the International Monetary Fund a monitoring role.

Euro-region leaders were discussing the creation of a lending facility for Greece, an EU official said. States would contribute in proportion to the size of their economies, said the official in Brussels, who spoke on condition of anonymity. The official said it’s not yet time” for a European bond.

Greek bonds, which have plunged since December on concern about the country’s ability to tackle its deficit, extended a three-day rally, with the yield on the two-year government bond falling 59 basis points to 4.86 as of 3:00 p.m. in Brussels.

The pre-summit statement bore the imprint of Merkel, who as head of Europe’s largest economy, pressed for strict conditions on any European financial lifeline for countries that spend too much and save too little.

Greece, representing 2.7 percent of the bloc’s $13 trillion economy, posted a budget deficit of 12.7 percent of gross domestic product in 2009, the highest in the euro’s 11-year history and more than four times the EU’s 3 percent limit.

Papandreou’s government needs to sell 53 billion euros ($73 billion) of debt this year, the equivalent of about 20 percent of GDP. Greece’s credit rating was cut by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings in December.

Papandreou’s plans to cut public-sector wages, trim welfare provisions and raise taxes have provoked street protests that threaten to throw the government off course.

Belt-tightening measures will be implemented in every detail,” Papandreou told reporters in Paris yesterday.