WRAPUP 2-Greece plans more costly bonds while markets keen

* Greece to issue another bond in February

* IMF chief says Greece needs political will to change

* Foreign investors bought most of 5-year bond

(Updates with comments, costs of bond issue, scandal probe)

By George Georgiopoulos and Lefteris Papadimas

ATHENS, Jan 26 (BestGrowthStock) – Greece said on Tuesday it will
sell more bonds in February, emboldened after its first debt
issue of the year was heavily oversubscribed, but the high price
will raise pressure for unpopular spending cuts.

Strong uptake for Monday’s 8 billion euro bond soothed
immediate concerns about Athens’ ability to finance itself in
the short term, despite market scepticism of its plan to slash
its huge budget deficit over the next three years.

But the decision to issue another bond next month could
prove costly as the returns now demanded by investors to hold
Greek debt are hefty.

“The increase in the cost of borrowing worries me because an
increase of 50 basis points means an increase of about 250
million to 300 million euros for Greece,” said Gikas
Hardouvelis, an economist at EFG Eurobank.

The head of the Greek Public Debt Management Agency, Spyros
Papanicolaou, told Reuters the country planned a 10-year bond in
February, of up to five billion euros. “The final amount will be
determined by the market response,” he said.

The Socialist government, which inherited a fiscal mess that
has hit Greece during its first recession in 16 years, was
heartened by investor demand for the bond sold on Monday —
which at 25 billion euros ($35.35 billion) was equivalent to
nearly half the country’s full-year financing needs.

But while giving the country a funding respite, the bond was
priced at a large premium — at a yield of 6.1 percent compared
to a similar bond issued in April at 5.5 percent.

Monday’s issue also highlighted Greece’s reliance on foreign
investors. A banking source told Reuters 78 percent of the bond
was bought by foreign investors.


Hardouvelis said he believes the government will cope with
rising borrowing costs this year, adding: “The key issue is to
move forward with significant spending cuts to reduce the budget
deficit by 4 percentage points (in 2010).”

David Riley, head of sovereigns at Fitch rating agency, said
the Greek bond issue had shown that governments now have to pay
dearly to finance themselves.

“The era…of exceptionally low borrowing costs is probably
or likely coming to an end,” Riley told Reuters in an interview.
“Obviously in the case of Greece that comes to an end in a very
dramatic manner.”

The European Union and rating agencies have raised pressure
on Athens to put its fiscal house in order but analysts fear
efforts to do so could be undermined by social opposition.

The government has launched a plan to cut the budget deficit
to below 3 percent of gross domestic product by the end of 2012
from 12.7 percent last year through welfare cuts, tax reforms,
improved revenue collection and savings on public sector wages.

Opinion polls show the public is willing to pay a price to
overcome the crisis as long as measures are perceived as fair
and those involved in graft are punished. On Tuesday, the ruling
Socialists launched a parliament investigation into scandals
that brought down the former conservative government.


The head of the International Monetary Fund, Dominique
Strauss-Kahn, said the Greek economy is at a “crucial crossroads
and needs to restore its credibility”.

“All depends on the political will,” he said. “I am
confident that the Greek economy’s current crisis can be
overcome, but with deep changes at all levels.”

The main public and private sector unions plan one-day
strikes in February and farmers have been protesting for more
than a week, blocking roads and border crossings to EU fellow
member Bulgaria, to demand higher prices for their produce.

The euro has fallen against the dollar this month partly due
to the Greek debt crisis, which has thrown the spotlight on
other weak euro members such as Portugal, Ireland and Spain.

European Central Bank Executive Board member Juergen Stark
warned on Tuesday that high public deficits could bring further
ratings downgrades of euro zone countries.

“In some countries 2009 deficits are expected to be in
double digits,” Stark said in a speech at a real estate sector
conference. “Thus, further country ratings and further negative
reaction in the financial markets cannot be excluded.”

Investors are closely watching Portugal’s government as it
announces on Tuesday steps to cut its budget deficit when it
presents its 2010 budget bill.

OECD chief Angel Gurria dismissed suggestions that fiscal
crises in peripheral euro zone member states could force them
out of the single currency, saying he expected pressure on
Greece to subside.

“No, I don’t see that danger,” he said, when asked about
strains leading to a break up of the euro. “There are no
conditions that could justify that assumption.”

The euro bounced on Monday after Greece’s debt auction but
was lower on Tuesday as investors moved out of the euro after
China implemented a planned increase in required reserves for
some banks, unnerving investors.

Greek markets were also lower on Tuesday after rising on
relief from Monday’s bond issue. Greek banking stocks were 2.6
percent lower while the premium demanded to hold its 10-year
bond compared with German Bunds was up at 301 basis points.

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WRAPUP 2-Greece plans more costly bonds while markets keen