Europe Economy Chief Calls for More Steps by Greece

The European Union’s top economic official said Greece should take more measures to cut the region’s largest budget deficit as evidence emerged that the country may have used swaps to mask its swelling debt.

“We expect that in due course the Greek government will take the necessary additional measures,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels today before a meeting of EU finance chiefs. Greek Finance Minister George Papaconstantinou said his task was like changing “the course of the Titanic.”

European finance ministers are meeting today to review Greece’s deficit plan under pressure from investors to spell out the concrete actions they will take to rescue the country if it fails to convince markets it can control its budget gap. Even as the risk premium on Greek debt fell last week on the prospect of European support, the euro weakened on concerns about the euro region’s stability.

Greece’s deficit, at 12.7 percent of gross domestic product last year, was the highest in the EU, and the government of Prime Minister George Papandreou has pledged to slash the shortfall to the EU limit of 3 percent in 2012 by cutting spending, freezing wages, raising taxes on items such as alcohol, and cracking down on tax evasion. It has set a target of 8.7 percent of GDP for this year, even as its cost-cutting moves have triggered strikes.

‘Terrible Mess’

Papaconstantinou said in Brussels today that the government is “doing enough” on the deficit. “People think we are in a terrible mess. And we are,” he said.

After the minister’s comments, the yield on Greece’s two- year bond rose to 5.230 percent, compared with 5.1547 percent on Feb. 12.

Luxembourg’s Jean-Claude Juncker, who will lead today’s meeting as head of the group of euro-area finance chiefs, said the ministers need reassurance that Greece can reach the target. “Greece will have to make sure it cuts its deficit by 4 percent of GDP for 2010. We have to check if that’s possible or not,” Juncker told reporters in Brussels.

Under stepped-up EU scrutiny, Greece will submit a report on its progress in cutting the deficit on March 16, followed by regular updates. Juncker said if the government wasn’t “on track” to meet its goals in mid-March, then “additional measures would be requested.”

‘Its Own House’

Austrian Finance Minister Josef Proell said the region had to “act in the interest” of the euro currency and it was up to Greece to cut its deficit before the EU offers help.

“Nobody can spare Greece the task of cleaning up its own house,” Proell said in Brussels. “Only then will we decide whether financial signals have to be sent,” he said. Germany’s Wolfgang Schaeuble also said additional measures that Greece should take will be considered.

Underscoring concerns about Greece’s public accounts, a Greek government inquiry has uncovered a series of swaps agreements with securities firms that may have allowed it to mask its growing debts. The Feb. 1 report commissioned by the Finance Ministry in Athens didn’t identify the securities firms that Greece used.

The EU’s statistics office, Eurostat, has asked for more information about the transactions by the end of February, European Commission spokesman Amadeu Altafaj told reporters in Brussels today. Johan Wullt, a spokesman for the Luxembourg- based statistics office, said that “until recently, Eurostat was not aware” of the transactions.

Debt Management

The government turned to Goldman Sachs Group Inc. in 2002 to get $1 billion through a swap, Christoforos Sardelis, head of Greece’s Public Debt Management Agency between 1999 and 2004, said in an interview last week. Sardelis said the EU statistics office and the rating companies were aware of the plan.

German Chancellor Angela Merkel’s Christian Democrats will push for new EU rules on bond swaps, CDU finance policy spokesman Michael Meister said in an interview today. Meister said that Goldman Sachs broke the “spirit” of euro-area rules in helping Greece with swaps.

Papaconstantinou said the contracts were legal at the time, and Greece doesn’t use them now. The contracts were “completely Eurostat legal,” he told reporters. Lucas van Praag, a spokesman for New York-based Goldman Sachs, didn’t respond to e- mails seeking comment.

10-Year Bonds

The extra interest investors demand to hold Greek 10-year bonds rather than German equivalents was 302 basis points today, compared with 296 basis points on Feb. 12. Still, it has eased from a high of 396 points at the end of January on expectations the euro region will line up behind Greece.

European leaders’ pledges of support last week stopped short of committing public funds and lacked detail as to whether any agreement would be applicable to other countries such as Portugal or Spain if necessary. The promises of support were coupled with demands on Greece to cut the deficit.

Otmar Issing, former chief economist of the European Central Bank, wrote today in the Financial Times that “financial aid from other EU countries or institutions that amounted, directly or indirectly, to a bailout would violate EU treaties and undermine the foundations” of monetary union.

“Once Greece was helped, the dam would be broken,” Issing said in the newspaper.

The German parliament’s research service said in a report published today that Greece may be eligible for financial aid from other euro member governments, according to EU treaties.

Central Banks

EU treaties bar the ECB or national central banks from bailing out members countries through buying their debt or offering loans, while rules on government-to-government support are more ambiguous. One clause in the Lisbon Treaty, which came into power last year, permits EU financial aid for a nation in “severe difficulties caused by natural disasters or exceptional occurrences beyond its control.”

Finance chiefs from the 16 nations sharing the euro started meeting at 5 p.m. in Brussels, where they also may decide who will replace Lucas Papademos in June as vice president of the European Central Bank. Juncker will hold a press conference after today’s meeting. They will be joined tomorrow by their colleagues from the rest of the 27 EU nations.