New Delhi: The Eurozone leaders will be meeting on Monday to take a final decision on the second bailout package for Greece. This as the Greek Prime Minister gets ready to introduce the widely unpopular austerity budget in Parliament; the budget will cut wages and pensions, and reform health care to get the $170 billion bailout.
Greece is already under a debt of $145 billion that was granted for the first bailout plan in 2010.
Diplomats and economists do not expect the package to resolve Greece’s economic problems: that could take up to a decade or more.
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 130-billion-euro programme, including a debt sustainability analysis critical to the IMF.
While there is still scepticism in some countries that Greece will be able to live up to its commitments – including implementing 3.3 billion euros of spending cuts and tax increases – officials said momentum was behind approving the deal and that that line was likely to prevail on Monday.
“At the moment it appears it will go exactly this way,” Austria’s 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.”
A euro zone official in contact with junior ministers involved in the conference call on Sunday said that while there were still gaps to be filled in some of the numbers, they were not so large that they risked derailing the agreement.
“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, who have been the most critical of Athens’ ability to commit, looked likely to come on board if the financing gaps could be closed.
Under the deal, Greece will have around 100 billion euros of its obligations written off via a debt restructuring involving private-sector holders of Greek government bonds.
The private sector – mostly banks and insurance companies – will swap bonds they hold for longer-dated Greek securities that pay a lower coupon, resulting in a real 70 per cent reduction in the value of the assets.
The bond exchange is expected to launch on March 8 and complete three days later, Greece said on Saturday. That means a 14.5-billion-euro bond repayment due on March 20 would be restructured, allowing Greece to avoid default.
The vast majority of the funds in the 130-billion-euro programme will be used to finance the bond swap and to ensure that Greece’s banking system remains stable: 30 billion euros will go to “sweeteners” to get the private sector to sign up to the swap, and 23 billion will go to recapitalise Greek banks.
A further 35 billion will allow Greece to finance the buying back of the bonds, and 5.7 billion 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 per cent of GDP to around 120 per cent by 2020 – the figure and timeframe that the IMF, ECB and the European Commission, together known as the troika, have established as sustainable.
The focus of discussion in Sunday’s conference call – and the issue expected to dominate the finance ministers’ meeting on Monday – is what “around 120 per cent” 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 per cent by 2020, and that’s if Greece runs a primary surplus next year, one official said.
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.
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 per cent in 2020 would still be sustainable.
“If we can get it down to 123 or 124 per cent, I think everyone’s going to be okay with that,” the euro zone official following the Sunday conference call said. “Everyone will find a way to tweak the numbers.”
There are also discussions about marginally lowering the interest rate on 110 billion euros of bilateral loans already made to Greece in May 2010 – the first package of support – to lighten the financing burden on Athens.
“We are far away from the objective,” Luxembourg’s Jean-Claude Juncker, who will chair Monday’s finance ministers’ meeting, said on Friday, referring to the 120 figure.
“All the discussions I will have… until Sunday night will try to move the figure nearer to the target.”
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 that it will be the end of problems for Greece. Figures last week showed that Greek gross domestic product contracted an annualised 7 per cent in the last quarter of 2011, much more than expected.
If the country is to be put on a long-term sustainable path, it needs to return to growth rapidly. But the structural and labour market reforms so far introduced have done little to improve that prospect and unemployment is rising rapidly.
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 the first review 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 of the country having to default if it cannot meet its obligations, and invite questions about its ability to remain in the euro zone.
And even Greece can meet its targets, there will still be concerns about Portugal, Spain and Italy, none of which is out of the woods yet.
With additional information from Reuters