Europe Struggles Over Greek Details

14.02.2012 09:15

WSJ: Europe Struggles Over Greek Details
BRUSSELS—European Union negotiators have yet to settle key elements of a complex bailout and debt-restructuring package for Greece—including how euro-zone governments will contribute to a desired cut in the country's debt burden—ahead of a pivotal meeting this week.
The Greek Parliament's backing for a deeply unpopular package of spending, wage and pension cuts, which sent European stocks and the euro higher on Monday, has shifted the focus of negotiations back to Brussels, ahead of a meeting of finance ministers due to start here Wednesday afternoon.

Central to the negotiations is resolving the thorny issue of how Greece's official creditors in Europe—other euro-zone governments and the European Central Bank—should participate in the debt restructuring. Euro-zone leaders are expected to make the final decision on the new bailout at their summit in March.

That would be one of the final pieces of the puzzle to fall into place to allow approval of at least €130 billion ($171.5 billion) in bailout loans from the euro zone and the International Monetary Fund that should avert a potentially chaotic Greek debt default next month.
Olli Rehn, the EU economics commissioner, described the Greek vote as a "crucial step" toward winning the bailout.

But he said other conditions needed to be fulfilled. They included identifying €325 million of extra budget cuts this year and, his spokesman said, "clear assurances from [Greek] political party leaders before they embark on the campaign for the next election."

Even after Wednesday's meeting, legislators in some countries, including Germany, will be required to have their say before the bailout aid will be released.

Germany and Greece's other official creditors have sought to tie the hands of Greek politicians after elections expected in April, seeking assurances they will back the unpopular package after then.

But in his public statements, the man opinion polls suggest will be the likely next prime minister, Antonis Samaras of the New Democracy party, has delivered less than wholehearted backing for the program.
"I want to avoid the jump over the cliff today, to buy time, to restore normality and to go to elections tomorrow," he told Parliament on Sunday. "This is why I ask you to vote in favor of the new loan agreement today and to have the ability tomorrow to negotiate and to change the current policy which has been forced on us."

German Chancellor Angela Merkel explicitly opposed that on Monday. "An amendment to the program can't and won't happen," she told a news conference.

A crucial question confronting negotiators in Brussels is whether to stick to a target set by euro-zone leaders in October for reducing Greece's debt burden, now about 160% of gross domestic product, to "around" 120% of GDP in 2020.

Officials said the target may be lifted to no more than 125% of GDP as part of a final deal.

Both the governments and the euro zone's central banking system are expected to give Greece some debt relief to ensure its debt falls below the 125% target in 2020, European officials said. But it remains to be seen exactly how.

On the table is a trade-off: The governments would agree to lower the interest rate on the loans made to Greece under the bailout it received in May 2010, and in exchange the ECB or the national central banks would agree to have their holdings of Greek bonds repaid at below their full face value.

"Nobody is going to put their cards on the table until Wednesday at midnight," said one official involved in the talks.

The interest rate on loans from the first bailout, which has already been lowered once, now stands at 3% for the first three years of a loan and then 4% after that.

Also under discussion is a move that could complicate a bond exchange intended to reduce the debt Greece owes its private-sector creditors by around €100 billion.

Investors participating in the exchange will receive new Greek bonds with decadeslong maturities and €30 billion of "sweeteners"—either cash or short-term bonds issued by the European Financial Stability Facility, the euro zone's temporary bailout fund.
The governments are now considering whether the sweeteners can be reduced and the extra money used to help close a financing gap expected for the Greek government over the next eight years, officials said.

But that step might discourage investors from participating in the exchange, undermining Europe's goal of having the debt exchange described as "voluntary."

The bloc's central banking system might participate in two ways.

First, the ECB bought Greek bonds with an estimated face value of about €50 billion on the secondary market over the previous two years in a futile effort to drive down Greek bond yields.

The central bank bought those bonds at sharp discount; the idea is that the ECB could forgo profit it would earn if the bonds were repaid in full and instead distribute the profit back to the national governments, which would then hand the money over to Greece.

Second, the national central banks of the euro zone hold an estimated €12 billion of Greek bonds on their investment portfolios. The national banks might simply accept losses on these bonds, officials said.

"They're both equally likely, but legally speaking, a loss on the portfolio bonds is easier," said one official.

Laurence Norman, Matina Stevis and Andrea Thomas contributed to this article.
Write to Matthew Dalton