No Final Decision on Greece Next Week as Slower Austerity Assumed

Friday, 09 Nov 2012 11:42 AM

 

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Eurozone finance ministers are unlikely to release a new tranche of loans to Greece on Monday as there is no agreement yet on how to make its debt sustainable but Athens is set to get two more years to cut debt, officials said.

Eurozone finance ministers, called the Eurogroup, meet on Monday in Brussels where the main topic of their discussions will be unfreezing lending to Greece, held up after Athens went way off track with promised reforms and fiscal consolidation.

Even though Greece passed a structural reform package in parliament on Wednesday and is to vote through an austerity budget for 2013 on Sunday, the ministers are not in a position to make a final decision.

"There is a very, very high ... probability of a second round of discussions to finalize everything," a senior EU official said.

The ministers will analyze all the reform commitments Greece will have made by then via parliamentary votes, to judge whether an austerity program promised in exchange for the loans was back on track.

Key to a final agreement is an analysis of how to make Greek debt, which is forecast to reach almost 190 percent of GDP next year, sustainable again after the country's spendthrift ways started the eurozone sovereign debt crisis in 2010.

International lenders — the International Monetary Fund, the European Commission and the European Central Bank, called the troika — cannot yet agree on the way to do that.

Estimates of the debt level by 2020 differ by 10-20 percentage points, officials have told Reuters.

Even if the analysis were ready for Monday, it would still need to be sent to national parliaments, notably Germany, which would then give their go-ahead to governments to approve the disbursement of the next, 31.5 billion euro tranche for Greece — money it needs desperately to pay off loans and shore up its banks.

TWO MORE YEARS

One thing the lenders do agree on now is that Greece, which will see its sixth year of deep recession in 2013, needs at least two more years to reach a primary budget surplus that would put its debt on a downward path.

The extra time would allow the economy to start growing again, otherwise it would never produce enough for the country to repay its debt.

This surplus target was set in March at 4.5 percent of GDP in 2014 and while there is no final decision yet, officials say it is likely to be moved to 2016 because of delays with reforms and a deeper than expected recession.

"The troika has been producing all of its reports and fiscal analyses and adjustment paths on the basis of an additional two years to reach a primary surplus of 4.5 percent of GDP," the senior official said.

The extra time would mean the eurozone would have to provide extra financing for Greece, which officials have put at 30 billion euros. This is politically difficult in Germany, the Netherlands and Finland where public opinion is weary of bailouts.

The two extra years would also mean that the targeted Greek debt-to-GDP ratio, set by lenders in March at below 120 percent in 2020, would be shifted to 2022, officials said.

Among the new instruments under consideration to reduce Greek debt are the removal of the 150-basis-point interest above financing costs on 53 billion euros of bilateral government loans to Greece, and lengthening the maturity of the loans.

Greece may also borrow from the eurozone permanent bailout fund to buy back its privately held debt, of which there is 50-60 billion euros, taking advantage of the deep discount it traded at to save money on redemptions and interest payments.

The IMF has been pushing for governments to write off some of the official loans to Greece, but Germany, the European Commission and other officials have said it is not legally possible.

Time pressure for a deal on Greece is growing because Athens has to redeem 5 billion euros worth of treasury bills on Nov. 16 and has been counting on cash from the next eurozone aid tranche to help cover that.

Since the money will not come in time, Greece wants to roll over the bills.

The senior EU official said eurozone ministers were aware of the Nov. 16 Greek redemption and that there would be no "accidental" default.

Greek Finance Minister Yannis Stournaras said on Friday the country had no reason for worry.

"Greece is doing whatever it should be doing, and Europe is doing what it should be doing... and the tranche will (eventually) be released," he said. "On Monday, we are expecting a political statement."

© 2014 Thomson/Reuters. All rights reserved.

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