Further Hurdles Ahead for Greece

13.02.2012 14:34

WSJ: ATHENS—After an epic political effort to pass another harsh austerity program into law, Greece faces still more tests to secure a new financial bailout as its euro-zone partners press for swift implementation of the new budget cuts in the face of intense popular opposition.

European financial markets responded with modest gains early Monday after Greece got a step closer to receiving a second rescue package to avoid defaulting on its debts next month.

A next big step in the cluttered approval process for the aid package is a meeting of euro-zone finance ministers, tentatively set for Wednesday, to sign off on cuts contained in Greece's austerity legislation to clear the way for the €130 billion ($171.59 billion) aid deal. A final decision on the new bailout isn't expected until March.

The euro rose against most of its major trading currencies. European stocks opened broadly higher and the cost of insuring euro-zone government debt against default eased. But market watchers remained cautious.

"There is no cause for major relief: In effect parliament only decided not to denounce further aid payments at this stage," Commerzbank foreign-exchange analysts said in a note Monday. In particular, the analysts worried whether there would still be the political will to follow through on reforms when Greece gets a new government after fresh elections, which could come as early as April.

As thousands of protesters clashed with riot police outside, the Greek parliament overnight approved a deeply unpopular package of spending and wage cuts to fill demands set by the European Union and the International Monetary Fund for more aid.

The package passed by a 199-74 vote, despite defections from the government ranks in the days leading up to vote. The two largest Greek parties—the socialist Pasok and conservative New Democracy—backed the measures, which include cuts in the budget, pensions and the minimum wage.

The Wednesday meeting of euro-zone finance ministers could coincide with the release of a revised assessment of Greece's debt sustainability, followed by the resumption of talks between Greece and its private-sector creditors to write 50% off the face value of their Greek bondholdings. A number of euro-zone parliaments, including Germany's, would then have to sign off on further aid before it can be paid out.

Germany's parliament will only vote on a second Greek bailout package after Athens' official lenders—the EU, the IMF and the European Central Bank, known as the troika—have presented their report on Greece's debt sustainability.

"We expressly welcome the decision of the Greek parliament," Chancellor Angela Merkel's spokesman said, adding the vote shows how Greece is able to take difficult measures.

Yet despite Sunday's vote, euro-zone finance ministers are expected to make a final decision on the €130 billion second rescue program only in early March, finance ministry spokeswoman Marianne Kothe said.

Furthermore, a written statement from the leading Greek political parties to support reform pledges after coming elections remains another prerequisite for the approval of further aid, she added, with ministers Wednesday evaluating the significance of the exit of the small, separatist Laos party from the government.

German Economics Minister Philipp Rösler Monday kept up the pressure on Greece to follow through with budget reforms in the face of social unrest.

"We took a step in the right direction, but are still far from the goal," Mr. Rösler told Germany's ARD television channel. "The implementation of structural reforms is crucial."

The vote by Greece's parliament wa a "crucial step" toward winning a second bailout program from its European partners, European economics affairs Commissioner Olli Rehn said Monday. However, Mr. Rehn said there is still further work to do for the new bailout package to be agreed.
"Yesterday's vote is a crucial step…toward the adoption of the second program," he told reporters. "I am confident that the other conditions, including…the identification of the concrete measures of the €325 million will be completed by the next meeting of the Eurogroup, which will then decide on the adoption of the program."

Greek political leaders last week refused to sign up to pension cuts, but identified measures to find alternative savings. However there was a €325 million shortfall they must still fill.

Mr. Rehn warned against Greece leaving the common currency: "[A] Disorderly fault of Greece would be a much worse outcome, with devastating consequences for society," he said, "especially [for] the weakest members."

In the aftermath of the angry clashes in Athens before the vote Mr. Rehn said: "I also wish to join my voice to the Greek government in condemning the violence that took place yesterday in Athens," which is in no way representative of the Greek population as a whole, he added.

Speaking shortly afterward, Mr. Rehn's spokesman said Greece's political party leaders still needed to give clear commitments that they will stick to the austerity measures agreed after an coming election.

"We expect to receive clear assurances from political party leaders before they embark on the political campaign for next election," spokesman Amadeu Altafaj Tardio said.

—Frances Robinson and Laurence Norman contributed to this article.

Greece to Borrow up to €35 Billion for Debt Buyback
ATHENS—Greece will borrow up to €35 billion from Europe's temporary bailout fund to finance an ambitious debt-buyback plan from the European Central Bank, according to official documents released by the government Saturday.

The 19-page bill sets out how the restructuring will be implemented and includes a plan through which Greece will buy back those bonds now held as collateral in the national central banks of euro-zone countries.

The plan is part of a raft of new measures Greece must take to secure a €130 billion bailout from its European partners and the International Monetary Fund, along with a €100 billion debt write-down the country is negotiating with its private-sector creditors.
The measures, which will be voted on in parliament Sunday, include sweeping reforms such as €1.1 billion worth of cuts in pharmaceutical costs, abolishing restrictive rules on tourist guides and opening up Greece's energy market to foreign investment.

According to the bill, the European Financial Stability Facility, the euro zone's transitional rescue fund, will lend Greece the money to carry out the buyback. The ECB will act as an intermediary in this transaction, buying the bonds on Greece's behalf.

Specifically, the draft legislation says that under the "ECB Credit Enhancement Facility Agreement [there will be] provision of financial assistance, up to the total amount of €35 billion, in order to offer the Hellenic Republic the ability to finance the possible buyback of its bonds that have been offered as collateral in the euro system, with EFSF bonds."

The euro system is the network of the 17 national central banks of countries that share the euro.

The measure, first discussed in July will be necessary because, after the bond swap that will restructure Greece's privately held debt, the country is expected to be declared in selective default, rendering its bonds of a quality too low to be held as collateral. The bill acknowledges that this bond-buyback plan will temporarily increase Greece's debt burden.

The EFSF is a special-purpose vehicle incorporated in Luxembourg. It is endowed with €440 billion worth of guarantees from 14 of the 17 euro-zone countries. Greece, Portugal and Ireland—the three euro-zone countries receiving bailouts—do not contribute to the EFSF.

The bill also formally states that Greece will issue €70 billion in new bonds to offer bondholders in exchange for their old bonds, which will undergo a 50% reduction in face value.

An additional €30 billion will be provided in the form of bonds issued by the EFSF and will be offered to private creditors as a "sweetener."

The law does not offer detail on the interest rate the new bonds will carry, but it does say the yields will be linked to the country's growth rate.

Over the next few days, Greece is also expected to unveil legislation on other aspects of the debt-swap plan, including the introduction of retroactive collective-action clauses to bind private-sector creditors who are reluctant to take losses.

The program—laid out in the legislation and more than a dozen accompanying documents—also sets new, easier budget targets for Greece as well as revised goals for its long-delayed privatization program.

According to a separate draft document, Greece will aim to raise €50 billion from privatizations over the "medium term" rather than by 2015 as it had previously committed.

But by the end of 2012, Greece should aim for €4.5 billion from privatizations, including the roughly €1.5 billion that it has raised to date. By the end of 2015, the goal is to have raised €15 billion.

The new program also eases some of the country's budget targets. Greece is expected to post a small primary budget deficit this year, and a primary surplus of €3.6 billion in 2013. Previously, the government's budget program called for a primary surplus to be achieved by this year.

Greece's banks, which are facing €17 billion in losses from the debt write-down plan, will have to achieve a core Tier 1 capital ratio of 9% by the third quarter this year, and 10% by the second quarter of 2013. Previously, the banks had been told to reach that 10% threshold by August of this year.

According to the document, banks facing capital shortfalls can appeal to the Greek state for aid in recapitalizing. In exchange, the banks will have to issue the Greek state common shares, or in some cases, contingent convertible bonds.

But bowing to fears about state control of the banks, the document says the state will hold only restricted voting rights that can be exercised in only "specific strategic decisions" depending on how much aid the banks need.

"The Government will ensure that Greek banks have business autonomy both de jure and de facto," according to the document. Further details of the recapitalization scheme will be defined in separate legislation.

Write to Alkman Granitsas