November 19, 2012 7:25 pm

Greece edges closer to €44bn bailout

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Eurozone finance ministers are inching towards a provisional deal to pay Greece up to €44bn of long-overdue aid, but are still struggling to find a compromise over longer-term measures to reduce Greece’s ballooning debt.

Finance ministers gathering in Brussels on Tuesday are aiming for a tentative political agreement to disburse the loans under an extended bailout programme, which would be formally approved after consultation with national parliaments, according to officials involved.

Yet there remain big differences between EU creditors and the International Monetary Fund over how to restructure Greece’s debt and whether it should be cut to 120 per cent of economic output by 2020, the benchmark for “sustainability”.

Tensions spilled out into the open last week as Christine Lagarde, the IMF chief, rebuffed Jean-Claude Juncker, chair of the eurogroup of finance ministers, when he suggested the target date should be extended from 2020 to 2022.

The fund’s consent is indispensable to releasing the bailout loans, making the public spat over the long term forecast a big obstacle. “This has become totemic,” said one official.

Wolfgang Schäuble, German finance minister, said this weekend that “a common line” on sustainability must be agreed. But he made clear that granting debt relief to Athens on official loans – as the IMF suggests as an option – would be “illegal”.

Alternatives are being explored to a writedown, including the ECB and eurozone countries giving up cash they are owed or launching another discounted bond buyback from private investors who have already suffered heavy losses.

“There are different ways how Greece is currently funded: bilaterally, via the IMF, by bond buys on the market. For all these there are options to look at maturities and interest rates,” Jeroen Dijsselbloem, the Dutch finance minister told the Dutch parliament.

German officials declined to comment on a Reuters report suggesting Berlin was pressing for Greece to buy back half its outstanding bonds from private investors at a quarter of their face value.

Although the difference over the long term debt levels appear relatively trivial, the IMF’s critics – including its emerging market shareholders, which have criticised the fund’s acquiescence with unrealistic debt projections in the Greece bailout – are watching events carefully for signs of the fund being forced to back down.

IMF officials continued to insist on Monday that it would not agree to disburse the fund’s share of Greece’s next bailout tranche without firm financing commitments to return Greece to debt sustainability.

Under its rules, the IMF cannot lend without agreeing a debt sustainability assessment, and has told its eurozone counterparts it will need to see clear evidence that they are prepared to write down past loans or otherwise fill Greece’s financing gap first.

The IMF initially calculated that without any relief, Greek debt will stand at nearly 150 per cent of gross domestic product by 2020, while the European Commission believes it will be just over 140 per cent.

Shifting the target to 2022 makes a significant difference to designing the debt relief programme, as it may not require official sector writedowns.

Mr Schäuble faces a tough political struggle to win approval for the revised package in the German Bundestag, where the opposition Social Democratic party is calling for the IMF to send officials to give evidence. Approval will also be required from the parliaments of AAA-creditors such as the Netherlands and Finland.

An emergency meeting of the government’s Christian Democrat supporters in the German parliament has been summoned for 8.30am on Wednesday to discuss the Greek rescue package, in an indication of government confidence in reaching a deal on Tuesday evening.

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