New Rift Over Terms Threatens Greece Bailout

By FRANCES ROBINSON And MARCUS WALKER

ATHENS—Europe's latest bailout for Greece is in danger of fraying over whether countries giving Greece aid should receive cash collateral.

The European Commission on Friday pressed euro-zone members to resolve the issue quickly or risk disrupting the bloc's bailout efforts. European equities continued to fall Friday as concerns over the economic outlook and the euro-zone debt crisis persisted.

A fresh rift over terms of Greece's bailout would further damage Europe's credibility, just as the region's leaders have been scrambling to convince investors that they can bring the Continent's debt crisis under control.

After it emerged this week that Greece had agreed to give Finland a hefty cash deposit as security for Finland's portion of the Greek bailout package, other European countries have begun to ask for a similar favor.

"Now, other countries are deciding that they'd like some collateral too," said Nick Matthews, euro-zone economist at Royal Bank of Scotland. "When you've got financial markets that are already concerned, the last thing you want to be seeing is a suggestion that some elements of the program are being renegotiated."

The more cash that Athens has to set aside to reassure its euro-zone creditors, however, the greater the burden for Greece—and for lenders such as Germany and France, which aren't seeking collateral.

The €110 billion ($158 billion) bailout package for Greece could be disrupted if other countries seek to imitate Finland's deal on collateral, the commission, the European Union's executive arm, said.

Finland and Greece announced a deal Tuesday under which Greece would deposit about €500 million in an escrow account with the Finnish government, as a precondition for Finland agreeing to release funds from the euro-zone's bailout fund.

The bailout fund's loans are guaranteed by the euro zone's solvent member states. The latest Greek bailout deal is politically contentious in Finland, where many voters and lawmakers opposed further aid loans. To assuage fears that taxpayers' money will be lost, the Finnish government insisted on obtaining collateral from Greece in return for underwriting the rescue loans.

Finland's quest for special treatment has drawn criticism from other euro-zone members, including Austria, the Netherlands, Slovakia, Slovenia and Estonia. Several officials from those countries have said that if Finland can get collateral from Greece, then others should, too.

Meanwhile, Greece's challenge in closing its gaping budget deficit is growing deeper. The Greek government said on Friday that the country's recession is worse than expected. Some Greek officials suggested gross domestic product could fall by more than 5% this year, instead of less than 4% as officially forecast.

A deeper-than-expected recession is likely to worsen Greece's budget shortfall, potentially forcing the country to slash spending and raise taxes by even more than planned.

Demands from a string of Greece's European creditors for collateral risk sending a signal to markets that political solidarity within the euro zone is at risk, Mr. Matthews said. That could further hurt investors' confidence in European policy makers, which already has taken a beating in recent weeks as governments have failed to agree on fundamental overhauls of the euro zone that would shore up its members' finances and improve the coordination of their economic policies.

A spokesman for EU Commissioner for Monetary Affairs Olli Rehn said countries must avoid "excessive collaterization" and attaching too many conditions to the rescue package for Greece agreed on July 21.

"It's up to euro-area member states to assess if this bilateral deal between Greece and Finland corresponds to [the] spirit of [the aid package] and does not introduce any element that may be considered a distortion," the spokesman said.

Austrian Finance Minister Maria Fekter, who has repeatedly called on Greece to speed up its privatization plan, said Thursday that she has circulated a proposal for a wider Greek collateral arrangement.

Under the Austrian proposal, euro-zone countries would get collateral from Athens depending in part on the amount that those countries' banks contributed to the aid package.

Countries' growing reluctance to expose their taxpayers to the risks of lending to Greece comes just as Germany and France are trying to cajole other euro members into greater economic cooperation. Earlier this week German Chancellor Angela Merkel and French President Nicolas Sarkozy proposed tighter policy coordination between euro-zone governments, in a quest to reassure markets about the cohesion and survival of the currency bloc.

Greek Finance Minister Evangelos Venizelos defended the collateral deal with Finland, noting it was foreseen in the July 21 accord between European leaders. "We were obligated to hold bilateral negotiations with Finland to see if, on a bilateral level, we could satisfy Finland's demands, and without creating problems" for the bailout, Mr. Venizelos said in a radio interview.

If other countries object to the Greco-Finnish deal, then European leaders might have to take a collective decision on the issue, Mr. Venizelos suggested.

He also said official forecasts for Greece's economic performance this year were "optimistic," though the contraction could be deeper than expected. He didn't commit to a new forecast.

Two other senior Greek officials involved in economic planning said the economy could contract by up to 5.2% this year, rather than 3.8% or 3.9% as previously forecast. They said a sharper-than-expected recession could push Greece's 2011 budget deficit to 8% to 8.5% of GDP, above the official target of 7.6%. Greece might also remain in recession in 2012, the officials said.

Austerity measures have hurt the Greek economy more than expected, while delays in collecting taxes and difficulties in reducing rampant tax evasion are also contributing to higher-than-expected budget shortfalls, the officials said.

Separately, Spain's Finance Minister Elena Salgado outlined new policies to help the country's economy and cut the budget deficit, including a lowering of the rate of value-added tax levied on purchases of newly built housing. She said lower VAT—4% down from 8%—will be applied only until the end of this year, and seeks to cut the large number of properties built in recent years that remain unsold.

—Alkman Granitsas
and Costas Paris
contributed to this article.

New Rift Over Terms Threatens Greece Bailout - WSJ.com

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