Greek Deal on Cuts Remains Elusive

WSJ: BRUSSELS—Officials on Wednesday assembled the pieces of a complex debt and bailout deal for Greece, but broad Greek political support for the accord, a key piece of the puzzle sought by the government's international creditors, remained elusive after hours of talks among the main political parties.
A meeting among Greek Prime Minister Lucas Papademos, the parties supporting his coalition, and New Democracy, the opposition conservative party, broke up early Thursday morning without an agreement on economic overhauls sought by the European Union and the International Monetary Fund in exchange for lending an additional €130 billion ($170 billion) to the Greek government.

A single issue was the sticking point: cuts in the Greek pension system. Mr. Papademos said after the meeting that the parties would continue to discuss the issue with EU and IMF officials, aiming to reach a final deal ahead of a meeting of euro-zone finance ministers Thursday evening in Brussels.

Early Thursday morning, Greek Finance Minister Evangelos Venizelos said the pension issue remained unresolved.
A deal appeared close after a breakthrough Tuesday, when the European Central Bank, one of Greece's largest creditors, agreed to include its bonds in the debt restructuring, people briefed on the issue said.

That is expected to help other parts of the deal fall into place: a restructuring of Greece's private-sector debt and the €130 billion bailout from the euro zone and the IMF.

Opposition leader Antonis Samaras would have to sign on to the program before either euro-zone governments or the ECB agree to step in and prevent a potentially catastrophic Greek debt default.
Supporting the program would be a bitter pill for Greek politicians to swallow, particularly with national elections likely in the coming months.

After nearly two years of austerity policies, the deal would cut spending by more than €3 billion, further slash retiree pension benefits, and reduce the minimum wage by 22%, according to a draft of the accord that was reviewed at Wednesday night's meeting.

Greece would also have to end permanent jobs in state-owned companies and cut 150,000 public-sector jobs by 2015, according to the draft.

The euro zone and the IMF, frustrated by what they say is the intransigence of Greek politicians against economic overhauls, have insisted that both the Greek governing coalition and the main opposition support the program.
Broad political support, they hope, will prevent the Greek program from running further off course, after years of Greece repeatedly missing its deficit-reduction targets.

But economists worry that the Greek economy is reaching the limits of austerity, beyond which deficit cuts harm the economy more than they bolster the government's finances. The draft agreement sees the Greek economy contracting 4%-5% this year before growing in the first half of next year—an assumption that may prove to be optimistic as the economy responds to the new austerity policies.

European Union and IMF officials have increasingly taken this criticism to heart, easing rules on spending EU funds in Greece and pushing an aggressive debt restructuring rather than insisting on Greece repaying its debts in full.
The restructuring will see Greece's private-sector bondholders receive new bonds with half of the face value of the old ones and maturities of as long as 30 years. The average coupon on the new bonds is likely to be less than 4%—and well below 4% through 2020.

The goal is to keep Greece's debt below 120% of gross domestic product by 2020.

The private-sector restructuring, which will reduce Greece's debt by around €100 billion, will get the government only part of the way there.

That is why the ECB's participation is needed. The central bank bought its Greek bonds at a steep discount over the past two years.
The agreement, should it be supported by Greek political parties, will see the bank forgo at least some profits it would earn if these bonds were repaid at 100 cents on the euro, people familiar with the decision said.

Instead, the ECB will exchange its Greek bonds for other bonds, issued by the euro zone's temporary bailout fund, valued at the purchase price of its Greek holdings, plus potentially some profit on top, these people said.

The amount of profit, if any, the ECB would earn is still under discussion, they said.

—Alkman Granitsas
in Athens
contributed to this article.
Write to Matthew Dalton