Euro Zone Clears Way for EU Decision on Greek Deal

WSJ: BRUSSELS—Euro-zone finance ministers said Thursday they were ready to give Greece money from a new bailout—provided a bond swap that will cut the debt Greece owes its private creditors by more than €100 billion goes according to plan in the coming week.

With the €130 billion ($173 billion) Greek bailout close to being finalized, European Union leaders at a summit Thursday evening said they would focus on policies aimed at battling the headwinds to economic growth created by government austerity programs across the 27-nation bloc.

Meanwhile, signs emerged that Germany was yielding to international pressure to boost the euro zone's bailout funds. Key German politicians, including two important allies of Chancellor Angela Merkel, said they were willing to back at least a temporary increase in the firewall against its debt crisis.

The finance ministers said Greece had passed most of the legislation sought by the "troika" of the country's official creditors—the European Commission, the International Monetary Fund and the European Central Bank—as the price for new aid.

That should allow the euro zone's temporary bailout fund, the European Financial Stability Facility, to issue €30 billion in bonds that will be given to private investors as "sweeteners" to encourage them to offer their Greek bonds in the debt swap.

It will also allow the bailout fund to issue €35 billion in bonds to euro-zone central banks as replacement collateral for loans they made to banks that were originally backed by Greek government bonds. It will also allow it to provide tens of billions of euros to Greece so the country's banks can be recapitalized after the losses from the bond swap.

"I myself, and all my colleagues, were very pleased" with Greece's progress on the economic overhauls it promised, said Finnish Finance Minister Jutta Urpilainen after the finance ministers' meeting.

But the ministers said in a statement that "high participation" in the debt exchange and "a final positive assessment" of the Greek actions are necessary conditions both for the disbursements of the EFSF bonds and for the second program. Greece launched the bond swap Feb. 24; the offer to its creditors will expire March 8.

 

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Final approval of the bailout will likely come during a teleconference planned for March 9, German Finance Minister Wolfgang Schäuble said after the meeting.

In Germany, Vice Chancellor and Economics Minister Philipp Rösler suggested Germany's resistance to expanding the bailout funds is waning. "This is currently not the right time for a debate," Mr. Rösler told Friday's edition of Handelsblatt newspaper, according to a prereleased article. "But of course we will look very closely at bond markets in the light of the pending exchange of Greek bonds."

Norbert Barthle, a lawmaker for Ms. Merkel's Christian Democratic Union party who is also the party's budget spokesman, said that a temporary increase in the bailout funds is an option and could be accomplished by combining the temporary EFSF with the planned permanent facility, the European Stability Mechanism.

The move would increase Europe's firepower to €750 billion from a planned €500 billion.

"We could think about boosting both [facilities] for a transition period in order to have a bigger volume at our disposal," Mr. Barthle said. "But we oppose raising the ESM volume permanently."

Michael Meister, deputy parliamentary floor leader and finance expert of Ms. Merkel's CDU, said he would support such a move, depending on the outcome of the debt restructuring in Greece and bond auctions in Italy and Spain.

"The force of the ESM might have to be increased," Mr. Meister said. "I can imagine to use remaining funds from the ESM or to increase the cash contributions into the ESM."

Apart from this, tough issues confront EU leaders now that the immediate threat of a Greek default has receded. Disputes over budget austerity are again bubbling up in Europe, as Spain and the Netherlands reported their budget deficits will be much larger than expected without a new round of spending cuts and tax increases.

Herman Van Rompuy who was re-elected as European Council president, said "the European Union is now much better equipped to deal with the crisis at hand, and to prevent similar situations from arising in the future."

European governments have repeatedly missed their deficit targets in the two years since they have withdrawn stimulus measures aimed at cushioning the economy from the blow of the financial crisis in 2008.

The missed milestones of the Greek bailout have received the most scrutiny in recent months; but the problem has also popped up in other countries attempting ambitious deficit-cutting programs, highlighting the pitfalls of attempting large deficit cuts during a time of weak economic growth or even recession.

Spain, with one of Europe's biggest deficits, is now seeking to renegotiate a target set with the commission, the EU's executive arm, after announcing that its deficit in 2011 was 8.5% of gross domestic product, well above the target of 6%. Spanish officials have said the government won't meet this year's target of 4.4% of GDP and may even unilaterally declare a new deficit target, setting up a showdown with the commission and other EU governments.

"I think it is very important that we now, after a long discussion get new rules and regulations—that we actually follow those," Swedish Prime Minister Fredrik Reinfeldt said. "That goes for everyone."

But meeting the old targets will require deep austerity measures from Spain, a heavy burden to bear for a country fighting a recession and an unemployment rate of around 23%, the highest in Europe.

Spain's case for leniency may be reinforced by problems facing the Dutch government, which has been one of the EU's prime enforcers of fiscal discipline throughout the crisis. The Netherlands's forecasting agency Thursday projected the government budget deficit would be 4.5% of GDP in both 2012 and 2013, well above the targets of 2.4% this year and under 2% next year.

The Dutch economy, like Spain, is expected to contract this year, struggling under the burden of austerity measures and a weak housing market that has prompted the country's heavily indebted households to rein in spending. The recession is undermining the Netherlands's aggressive austerity plan, which aimed to bring the deficit under the EU limit of 3% in 2012, a year earlier than the deadline set by the commission.

Dutch Prime Minister Mark Rutte, speaking to reporters ahead of the summit, offered some hints that the government was reconsidering its hard line. "Things need to be more balanced in Europe," Mr. Rutte said. "We need growth and budgetary discipline." The subject of growth and employment will be a central topic at Thursday's summit. The governments will discuss a menu of policies, including cutting red tape for smaller businesses, helping them get financing from venture capital firms and using EU funds to help young people find jobs.

Frances Robinson, Laurence Norman and Andreas Kissler contributed to this article.

Write to William Boston