Second Greek Bailout in Reach Despite Funding Gaps (Article by Reuters 20.02.2012)

20 Feb

Euro zone finance ministers inched towards approving a second bailout for debt-laden Greece on Monday that will resolve Athens’ immediate repayment needs but seems unlikely to remedy the dire state of the nation’s shattered economy.

Agreement on a 130-billion-euro rescue package on draconian conditions would draw a line under months of uncertainty that has shaken the currency bloc, averting imminent bankrupcty, although work remained to make the numbers add up.

Greek Parliament
PNC | Brand X Pictures | Getty Images

But diplomats and economists say it may only delay a deeper default by a few months. A turnaround could take a decade or more, a bleak prospect that brought thousands of Greeks onto the streets to protest against austerity measures on Sunday.

French Finance Minister Francois Baroin said all the elements were in place to reach an agreement and Greek Finance Minister Evangelos Venizelos said he expected a deal. The finance ministers began meeting at 1530 GMT.

“We expect today the long period of uncertainty—which was in the interest of neither the Greek economy nor the euro zone as a whole—to end,” Venizelos said in a statement.

Dutch Finance Minister Jan Kees de Jager, the most outspoken of Greece’s northern creditors, insisted on arrival that the Netherlands could not approve the rescue package until Greece had met all its obligations.

Finland, another stern creditor, signed a side-deal with Greece on Monday for Greek banks to provide collateral in cash and highly rated assets in return for Finnish loan guarantees, removing one long-running obstacle.

Euro zone ministers need to agree new measures to make the financing work, given the ever-worsening state of the Greek economy. That may also involve an indirect contribution from the European Central Bank[cnbc explains] and euro zone national central banks.

An agreement will enable Greece to launch a bond swap with private investors to help reduce and restructure Athens’ vast debts, put it on a more stable financial footing and keep it inside the 17-country euro zone.


Skeptics question whether a new Greek government will stick to the deeply unpopular program after elections due in April, and believe Athens could again fall behind in implementation within months, prompting exasperated lenders to pull the plug once the euro zone has stronger financial firewalls in place.

Senior Greek finance ministry and European Central Bank officials held a conference call on Sunday to go over the final details of the programme, including a report assessing the likelihood of Greece lowering its debt which is critical to the International Monetary Fund.

While there is scepticism in EU paymaster Germany and other countries that Greece will be able to meet its commitments, including implementing 3.3 billion euros of spending cuts and tax increases, officials said momentum was building for a deal.

Finnish Finance Minister Jutta Urpilainen said Greece had done everything it could although work remained to be done.

“There are many open details … A big issue is that we have to get Greece’s debt on a level that is sustainable and enables Greece to survive,” she told reporters in Helsinki.

A euro zone official in contact with those involved in the Sunday conference call said the financing gaps were not so large that they risked derailing the whole process.

“I don’t see anybody wanting to be responsible for pulling the plug on the deal at this late stage,” he said.

European shares and the euro moved higher on Monday as investor appetite for riskier assets was boosted by expectations of an agreement and after a surprise policy easing by China.

One note of caution came from economists at Citigroup, who said they expected the go-ahead for a bond swap to reduce Greece’s debts on Monday, but final approval of the full deal may not come until after an EU leaders’ summit on March 1.


In an implicit challenge to Franco-German leadership in the euro zone, a group of 12 countries led by Italy, Britain and the Netherlands called for a shift in focus towards promoting growth by opening up the EU’s internal market for services. Berlin and Paris declined to sign the joint letter to heads of the EU institutions advocating a new economic agenda.

Several thousand Greeks demonstrated on Sunday against the austerity measures to reduce the country’s debt, although the numbers were much lower than earlier protests.

Greek Prime Minister Lucas Papademos flew to Brussels for last-minute preparations as about 3,000 demonstrators massed on the capital’s central Syntagma square and riot police shielded the national assembly from the threat of attack.

Under one crucial element of the deal, Greece will have around 100 billion euros of debt written off via a restructuring involving private-sector holders of Greek government bonds.

Banks and insurers will swap bonds they hold for longer-dated securities that pay a lower coupon, resulting in a real 70 percent reduction in the value of the assets.

The bond exchange is expected to launch on March 8 and complete three days later, Athens said on Saturday. That means a 14.5-billion-euro bond repayment due on March 20 would be restructured, allowing Greece to avoid default.

The vast majority of the funds in the 130-billion-euro programme will be used to finance the bond swap and ensure Greece’s banking system remains stable: 30 billion euros will go to “sweeteners” to get the private sector to sign up to the swap, 23 billion will go to recapitalize Greek banks.

A further 35 billion will allow Greece to finance the buying back of the bonds, and 5.7 billion will go to paying off the interest accrued on the bonds being traded in.

The overall objective is to reduce Greece’s debts from 160 percent of GDP to around 120 percent by 2020—the figure and timeframe the IMF, ECB and the European Commission, together known as the troika, have established as sustainable.


One focus of Monday’s finance ministers’ meeting was what “around 120 percent” means in practice.

A debt sustainability report delivered to euro zone finance ministers last week showed that under the main scenario, Greek debt will only fall to 129 percent by 2020.

The IMF has said if the ratio cannot be cut to near 120 percent, it may not be able to help finance the bailout. U.S. Treasury Secretary Tim Geithner urged the IMF to do its bit.

This is a very strong and very difficult package of reforms, deserving of support of the international community and the IMF,” Geithner said in a statement on Sunday.

A number of measures, including restructuring the accrued interest portion, reducing the “sweeteners” and having euro zone national central banks take part in the debt swap are being considered to move the figure closer to 120.

There are also discussions about marginally lowering the interest rate on 110 billion euros of bilateral loans already made to Greece in May 2010, the first package of support, to lighten the financing burden on Athens.

The ECB could also decide to forgo the profit on around 40 billion euros of Greek bonds it holds to lower Athens’ burden.

Sources involved in the conference call on Sunday said a combination of the measures was likely to be used to reduce the gap to between 129 percent and around 120 percent.

“If we can get it down to 123 or 124 percent, I think everyone’s going to be okay with that,” the euro zone official

said. “Everyone will find a way to tweak the numbers.”

A deal would provide immediate relief to Athens and financial markets, which have been kept guessing since the bailout package was announced last October.

But no one is pretending it will end Greece’s problems. Figures last week showed its economy shrank 7 percent year-on-year in the last quarter of 2011, much more than expected, with further cuts likely to make matters worse.

The troika, responsible for monitoring Greece’s reform progress, carries out quarterly reviews, while the European Commission will soon have dozens more monitors on the ground.

Already there is concern that at any one of those reviews of the new programme, if it is approved on Monday, Greece will be bound to be behind, especially if GDP continues to slump.

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