Provopoulos Confident Greece Will Meet ‘Very Ambitious’ Goals
February 22, 2010, 4:02 AM ESTBy Jana Randow and Christos Ziotis
Feb. 22 (Bloomberg) -- Greek central bank Governor George Provopoulos said he’s confident the government will meet its “very ambitious” deficit-reduction goals and ward off any further credit-rating downgrades.
Rating agencies “want evidence that the plan is implemented on target” and “some time will need to elapse before they can form a better judgment,” Provopoulos, also a European Central Bank council member, said in an interview in Athens on Feb. 19. “I have full confidence” in the government meeting its goals, he said. “They have to succeed. And they will, I’m sure of that.”
Greece’s financial distress could be exacerbated at the end of this year when the ECB is due to revert to old collateral rules that were loosened during the global recession. If Moody’s Investors Service cuts its Greek credit rating to the same level as the other major ratings companies, Greek government bonds would no longer be eligible as collateral at the ECB, making it more difficult for the nation to borrow.
“The government has said already on several occasions that it will take any additional measures required in order to achieve its goal,” Provopoulos said. “This gives me comfort. Even if some risks materialize -- like growth -- the government is prepared to take immediate corrective action.”
Skeptical Investors
Investors are skeptical that Greece can cut its budget deficit from 12.7 percent of gross domestic product to under 3 percent by 2012. The government’s plan assumes the economy will contract 0.3 percent this year before growing 1.5 percent in 2011. It shrank 2 percent last year, compared with the government’s forecast for a 1.2 percent contraction.
The premium investors charge to hold Greek 10-year bonds instead of the German benchmark soared to 396 basis points on Jan. 28, the most since 1998. The cost of insuring Greek bonds against default jumped to a record high, exceeding the rates in emerging Asian economies such as Vietnam, Indonesia and the Philippines.
Markets are overreacting, Provopoulos said.
“They take advantage of the weak link to make profits,” he said. “It’s clear that there is a certain degree of overshooting. Given the high degree of uncertainty in the markets, one should not expect that the situation will normalize overnight.”
If Greek debt were no longer eligible as ECB collateral, the government would find it harder to find buyers for its bonds and yields would probably rise.
‘Exactly As Promised’
The ECB currently accepts bonds rated BBB- by at least one rating agency as collateral for loans. Under the old rules, due to be reinstated on Jan. 1 next year, A- is the minimum rating required. Standard & Poor’s and Fitch Ratings cut Greece’s credit grade to BBB+ in December.
Moody’s has said it may lower its A2 rating two steps to Baa1 if Greece only partially implements its deficit-cutting plans. That would render Greek bonds ineligible at the ECB.
ECB President Jean-Claude Trichet said on Jan. 14 that the Frankfurt-based central bank won’t make allowances “for the sake of any particular country” and Greece won’t win “any special treatment.”
The ECB will continue its enhanced credit support to the banking system, Provopoulos said, suggesting it may continue lending banks as much cash as they want at its benchmark rate, at least in weekly refinancing operations.
“The ECB never said ‘we have reached the end of the road’,” he said. “Of course there are signs of normalization of the situation, of an improvement. This will be taken into account” when policy makers decide in March on the next steps in the exit from emergency lending measures, Provopoulos said.
Under Pressure
European finance ministers turned up the pressure on Greece last week to rein in the region’s largest budget gap. The country might be asked to raise its value-added tax, introduce a levy on luxury goods and cut capital spending if it fails to show sufficient progress by mid-March, when the European Commission is due to review the government’s progress.
While European leaders on Feb. 11 pledged to take “determined and coordinated” action to support Greece if the need arose, they left open how they would respond to a fresh wave of speculative attacks against Greece or other countries such as Spain and Portugal, which are also struggling to cut their budget deficits.
Provopoulos said he takes the commitment of European governments to stand by Greece “at face value.” The lack of a detailed rescue plan isn’t disappointing, he said.
“Everybody knows how critical the situation is. Of course, an expression of willingness and readiness from the European family, the euro zone, to help in case it’s needed is quite reassuring and understandable.”
--With assistance from Maria Petrakis in Athens. Editors: Matthew Brockett, Fergal O’Brien
To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Christos Ziotis in Athens at cziotis@bloomberg.net.
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
