Eurozone ministers eye Greek aid deal

LEIGH THOMAS AND ROBIN EMMOTT
Last updated 08:50 21/11/2012

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Eurozone finance ministers are likely to give tentative approval to the next tranche of loans to Greece and seek a way to cut the country's huge debt today, although no money is likely to be disbursed before December.

Officials familiar with preparations for the finance ministers' meeting expect a "political endorsement in principle" on unfreezing loans to Athens, after Greece completed almost all the reforms that were required.

"It is clear that Greece has delivered," the chairman of the eurozone finance ministers, Jean-Claude Juncker, told reporters before the meeting.

"We must still reach an understanding on several details and I would expect that the chances are good that we will come to a final and joint solution this evening. But I'm not entirely certain," he said.

EU Economic and Monetary Affairs Commissioner Olli Rehn said on his way into the meeting that the ministers would tackle the issue of cutting Greek debt.

"The Eurogroup this evening will take the necessary decisions to ensure the debt sustainability of Greece," he told reporters. "It's essential that we will be able to decide on a set of credible measures on reducing the debt burden of Greece tonight."

The eurozone and the IMF want to be sure that Greek debt, expected to be almost 190 per cent of GDP next year, will fall at some point to a more sustainable 120 per cent, so that they will not have to keep financing Athens.

The IMF and the eurozone are at odds on whether to shift the original target date for Greece to do that from 2020 to 2022, torn between the need to retain market confidence and allowing the Greek economy some breathing space.

PROSPECT OF DEBT RELIEF IN THE FUTURE?

Rehn also said the eurozone should be ready to do more for Greece in the coming years to ensure Greek debt was sustainable if the country stayed on track, in an apparent reference to the German Bundesbank's idea of a reduction in official sector loans to Athens as a reward for diligent reform implementation.

"It's essential now that we take a decision on a set of credible measures on debt sustainability and, at the same time, we need to be ready to take further decisions in the light of future developments and of course, conditional and dependent on the full implementation of the reforms and the programme by Greece over the coming years," Rehn said.

He did not elaborate, but the idea of a haircut on official loans is now off the table because many countries, including Germany, see it as politically and legally impossible.

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French Finance Minister Pierre Moscovici said a deal was at hand, but everybody would have to make concessions.

"I have the impression that a political agreement is within reach and I think it is our duty as finance ministers to get it this evening. Everyone has to accept that they will have to go beyond their red lines," Moscovici said.

Greece got a second financing programme from the eurozone and the International Monetary Fund in February, but two subsequent parliamentary elections and a deep depression threw its reforms and fiscal consolidation off course.

Lending was frozen in June and to get it going again Greece had to show it was fully committed to a detailed package of economic reforms or "prior actions".

How to reduce debt in a country where the economy is expected to contract for a sixth year running in 2013 is one of the biggest challenges of the talks, which are based on a debt sustainability analysis prepared by the IMF, the European Commission and the European Central Bank.

Options include halving the interest on existing, bilateral loans to Greece from the current 150 basis points above financing costs, lengthening loan maturities, returning profits from the ECB's Greek bond portfolio and a debt buy-back.

Germany has floated an idea that Greece could buy back half of its €60 billion (NZ$94b) in bonds remaining in private hands, offering 25 cents per euro.

Eurozone officials have asked for a legal analysis of a debt buy-back and a more operational description for the Tuesday talks. A senior French official said a decision on the buy-back could even be taken on Tuesday.

"It's possible as soon as tonight, it's an option on the menu," the official said.

TIMELINE AND TRANCHE SIZE

Once a deal is done, proposals on how to cut Greek debt and provide additional financing can be sent to national parliaments for approval, a step expected to be completed by November 30.

This will give Athens time to complete the few outstanding "prior actions". International lenders will check if the remaining reforms are in place on November 28 and eurozone finance ministers will make a final decision to pay the next tranche to Athens on December 3, according to the schedule seen by Reuters.

Greece and the European Commission would then sign a revised memorandum of understanding on December 4 and Greece would get the money on December 5.

Having missed two tranche payments because of the suspension of the programme, Greece should now get a total of €44b if the next tranche, due in December, is paid out together with the overdue ones.

More than half of that total is cash to recapitalise Greek banks after Greece's debt restructuring hurt their capital base. But some officials said incomplete data on the recapitalisation might result in the payout of €31b, rather than the full €44b.

The ministers will also have to decide how to finance two extra years, until 2016, they gave Greece to reach the target of a primary surplus that would allow the country to start cutting its debt pile in a sustainable way.

The troika estimated that such an extension would entail almost €33b euros more in financing for Athens, which is politically difficult because of growing opposition to bailouts in many eurozone countries, notably Germany and Finland.

- Reuters

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