Published November 12, 2012
BRUSSELS/BERLIN – Euro zone governments will not agree to disburse more money to debt-ravaged Greece on Monday, despite the country approving a tough 2013 budget, because there is not yet a consensus on how to make its debts sustainable into the next decade.
Finance ministers gathered in Brussels should, however, give Athens two more years to make the budget deficit cuts demanded of it, a concession that will require funding of around 32 billion euros, according to a draft document prepared for the meeting.
Loans have been held up since Athens, which has received two bailout packages from the euro zone and IMF, went off-track with promised reforms and budget cuts, partly as a result of holding two elections in the space of three months earlier this year.
The Greek parliament passed an austerity budget for 2013 late on Sunday and a structural reform package last Wednesday, meeting the conditions for the release of the next tranche of 31.5 billion euros of emergency loans from the euro zone.
But officials said the money would not be released since ministers are waiting for the European Commission, the IMF and the European Central Bank, together known as the troika, to present their 'debt sustainability analysis'.
As a result, the ministers may have to talk again later this week, either face-to-face or by teleconference.
"There won't be any definitive decisions today, but I think the general feeling is that we would like the next disbursement to done in the most efficient way possible," said Jean-Claude Juncker, the chairman of euro zone finance ministers.
German Finance Minister Wolfgang Schaeuble said he wanted to hear what troika inspectors had come up with during their visits to Greece before deciding what steps to take next.
"I'd like to see if Greece has fulfilled all its obligations and then I'd like to hear the (EU/IMF) troika report because it depends on the Greek government having found a solution with the troika, and I haven't read anything on that," he said.
A compliance report by the troika calculated that if ministers agree to give Greece two more years to meet its targets, extra funding of around 15 billion euros would be needed up to 2014 and another 17.6 billion for 2015/16 -- amounting to a 32.6 billion euros funding hole to be filled.
Discussion on how to close that gap will be top of the ministers' agenda on Monday.
"We'll have to see later what proposals are being put forward by the troika in respect of the funding gap," said Irish Finance Minister Michael Noonan as he entered the meeting.
Christine Lagarde, the managing director of the IMF, was positive as she arrived in Brussels, saying Greece had done the work it needed to do and its creditors now needed to act.
"Greece has done its work and shown some real resolve, so it's now for the creditors to do the same and certainly the IMF, as always, will play its part," she told reporters.
"We are in for, not a quick fix, but a real fix. Not a quick fix, but a real fix," she said with a broad smile.
The IMF has been pushing for governments to write off some of their official loans to Greece, but Germany, the European Commission and others have said it is not legally possible.
The ministers will examine the commitments Greece has made on tackling structural problems in its economy -- the troika set at least 90 specific targets for the Greek government -- and assess whether its programme is getting back on track.
The key issue for euro zone governments is the debt analysis, which will set out how Greece is supposed to cut its debt from around 190 percent of GDP next year to 120 percent by 2020 or shortly afterwards, and whether the goal is possible.
The IMF has set 120 percent as the target, saying that anything much above that will not be sustainable given Greece's low growth prospects and high external borrowing requirements.
The troika has not yet agreed on a single estimate for Greek debt in 2020 or on the best way to reduce it. Estimates between the institutions differ by 10-20 percentage points, officials say.
Once there is an agreement, it will be sent to national parliaments to get approval for the disbursement of the next aid tranche -- money Athens needs urgently to pay off loans and shore up its banks.
"Thoroughness is a must and before we decide, Germany's Bundestag has to be involved, just like in other countries," said Schaeuble.
In the meantime, Greece will be allowed to issue more short-term paper to keep itself afloat.
Officials hope granting Greece two more years to meet its goals will allow the economy to start growing again, otherwise it would never produce enough for the country to repay its debt.
A target was set in March for Greece to achieve a primary surplus of 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 two extra years would also mean that the targeted Greek debt-to-GDP ratio, 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 euro zone bailout fund to buy back its privately held debt, of which there is 50-60 billion euros, taking advantage of the deep discount it trades at to save money on redemptions and interest payments.
Athens has to redeem 5 billion euros worth of treasury bills on November 16 and has been counting on cash from the next euro zone aid tranche to help cover that. Since the money will not come in time, Greece wants to roll over the bills.
"We are very confident the issue will be rolled over without any problem," a senior debt agency official told Reuters. "We have liaised with the ECB regarding the ceiling on the outstanding stock of T-bills and there is no problem."
A senior EU official also said euro zone ministers were aware of the November 16 Greek redemption and that there would be no "accidental" default.
(Additional reporting by Lefteris Papadimas, Deepa Babington and Harry Papachristou in Athens, Robin Emmott and Annika Breidthardt in Brussels. Editing by Mike Peacock)