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Decision day for 2nd Greek bailout

20 February 2012, 10:55

Greece - Euro zone finance ministers are expected to approve a second bailout for Greece on Monday, a move they hope will draw a line under months of turmoil that has shaken the currency bloc, although there is work to be done to make the figures add up.

Diplomats and economists do not expect the package to resolve Greece's economic problems: That could take up to a decade or more - a bleak picture increasingly apparent to several thousand Greeks who demonstrated on Sunday against seemingly endless austerity measures.

The ministers still need to agree new measures to square the numbers, given the ever-worsening state of the Greek economy. But they hope agreement on Monday will help restructure the country's vast debts, put it on a more stable financial footing and keep it inside the single currency zone.

Senior officials from euro zone finance ministries and the European Central Bank held a conference call on Sunday to go over the final details of the €130bn programme, including a debt sustainability analysis critical to the IMF.

While there is still scepticism in Germany and other countries that Greece will be able to live up to its commitments - including implementing €3.3bn of spending cuts and tax increases - officials said momentum was building for approval of the deal.

"At the moment it appears it will go exactly this way," Austrian Finance Minister Maria Fekter said on Sunday when asked in a TV interview if the package would be approved. "I don't think there is a majority to go a different way because a different way is enormously arduous and costs lots and lots of money."

Pulling the plug

A euro zone official in contact with junior ministers involved in the Sunday conference call said that, while there were still gaps to be filled, they were not so large that they risked derailing the whole process.

"I don't see anybody wanting to be responsible for pulling the plug on the deal at this late stage," he said.

"The gut feeling is that this is going to go through - everyone feels the pressure this time to deliver," he said, indicating that the Netherlands, Finland and Germany, which have been the most critical of Athens' ability to commit, looked likely to come on board if the financing gaps could be closed.

Several thousand Greeks demonstrated on Sunday against punishing austerity measures to reduce their country's debt, on the eve of the make-or-break talks.

Greek Prime Minister Lucas Papademos flew to Brussels for last-minute preparations as about 3 000 demonstrators massed on the capital's central Syntagma square.

Riot police shielded the national assembly, braced against a repeat of riots a week ago that saw buildings torched and looted across downtown Athens after a much larger rally involving tens of thousands.

Repayment due

Under one crucial element of the deal, Greece will have around €100bn of debt written off via a restructuring involving private-sector holders of Greek government bonds.

Banks and insurers will swap bonds they hold for longer-dated securities that pay a lower coupon, resulting in a real 70% reduction in the value of the assets.

The bond exchange is expected to launch on March 8 and complete three days later, Athens said on Saturday. That means a €14.5bn bond repayment due on March 20 would be restructured, allowing Greece to avoid default.

The vast majority of the funds in the €130bn programme will be used to finance the bond swap and to ensure that Greece's banking system remains stable: €30bn will go to "sweeteners" to get the private sector to sign up to the swap, €23bn will go to recapitalise Greek banks.

A further €35bn will allow Greece to finance the buying back of the bonds, and €5.7bn will go to paying off the interest accrued on the bonds being traded in.

The overall objective is to reduce Greece's debts from 160% of GDP to around 120% by 2020 - the figure and timeframe that the IMF, ECB and the European Commission, together known as the troika, have established as sustainable.

Sustainability report

The focus of discussion in Sunday's conference call - and the issue expected to dominate the finance ministers' meeting on Monday - was what "around 120%" means in practice.

A debt sustainability report delivered to euro zone finance ministers last week showed that under the main scenario, Greek debt will only fall to 129% by 2020.

The IMF has said if the ratio cannot be cut to around 120%, it may not be able to help finance the Greek programme.

US Treasury Secretary Tim Geithner urged the International Monetary Fund to support the programme.

"This is a very strong and very difficult package of reforms, deserving of support of the international community and the IMF," Geithner said in a statement on Sunday.

As well as working to get the number down, there are moves to convince members of the troika that a debt level of 123-125% in 2020 would still be sustainable.

Lower interest

"If we can get it down to 123 or 124%, I think everyone's going to be okay with that," the euro zone official said after the Sunday conference call. "Everyone will find a way to tweak the numbers."

A number of measures, including restructuring the accrued interest portion or reducing the "sweeteners", are being considered to move the 129 figure closer to 120, a euro zone official familiar with the negotiations said.

There are also discussions about marginally lowering the interest rate on €110bn of bilateral loans already made to Greece in May 2010 - the first package of support - to lighten the financing burden on Athens.

Central banks could help too.

The ECB is weighing up whether to allow Greek bonds held in euro zone central banks' investment portfolios to be subject to the same writedowns private investors are set to take, central bank sources said on Friday.

The central banks hold around €20bn of Greek bonds in their traditional investment portfolios and the ECB holds about double that amount from its emergency bond-buying programme. It has also signalled it could forego the profits made on the latter at some point.

Shrinking economy

"All the discussions I will have ... until Sunday night will try to move the figure nearer to the target," Luxembourg's Jean-Claude Juncker, who will chair Monday's finance ministers' meeting, said on Friday, referring to the 120 figure.

If the finance ministers do succeed in reaching an agreement on Monday, it will provide immediate relief to Athens and financial markets, which have been kept guessing since the bailout package was announced last October.

But no one is pretending it will end Greece's problems. Figures last week showed its economy shrank 7% year-on-year in the last quarter of 2011, much more than expected, with further cuts likely to make matters worse.

The troika, which is responsible for monitoring Greece's reform progress, carries out quarterly reviews, while the European Commission will soon have dozens more monitors on the ground in Athens as part of the second package.

Already there is concern that at any one of those reviews of the new programme - if it is approved on Monday - Greece will be found to be behind, especially if GDP continues to slump.

That will again raise the threat the country will have to default if it cannot meet its obligations, and invite questions about its ability to remain in the euro zone.

- Reuters

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