EUROPE FACES a new confrontation over the lending power of its rescue funds after finance ministers struck a complex deal to provide Greece with its second EU-IMF bailout in less than two years.
The new Greek pact, which will see the stricken country receive €130 billion in emergency loans, came early yesterday after private creditors reluctantly agreed to increase their contribution to the bailout.
European Commission chief José Manuel Barroso said the deal “closes the door” against the prospect of an uncontrolled default by Greece next month.
Following 13 hours of talks between euro zone finance ministers on Monday night, the next phase of the process is the initiation of a debt-swap transaction to cut Greece’s national debt by up to €107 billion. Although the deal is voluntary for the creditors, their chief negotiator said the levels of participation were likely to be quite high.
“We really are quite confident that once investors study this and reach their own decision, they will be attracted to this deal,” said Charles Dallara, chief of the Institute of International Finance banking lobby, on Bloomberg television. To increase the sustainability of Greece’s debt, the European Central Bank and national central banks agreed to forgo profit on the Greek bonds they hold to enable the money to go back to Athens.
In order to secure the release of new loans, however, Greece must in the next eight days execute a number of “prior actions” outstanding from its first bailout.
The deal largely settles the Greek question for the moment, yet difficult talks now loom over a proposed increase in the €500 billion firepower of the European Stability Mechanism (ESM) permanent bailout fund. Although euro zone finance ministers are agreed on the principle of an increase, diplomatic and official sources say German chancellor Angela Merkel continues to hold out against any change.
After European leaders postponed a decision on this last autumn, the matter is now set to come before an EU summit on Thursday week in Brussels.
Discussions have centred on adding the remaining €250 billion lending capacity in the European Financial Stability Facility (EFSF) temporary fund with the ESM when it comes into force this summer. “I trust the leaders will take this decision. That’s our view at least, this decision should be taken,” economics commissioner Olli Rehn told reporters. He added that the IMF’s global members want Europe to move first before they increase the IMF’s resources, essential to ringfence the euro zone against contagion from the debt crisis.
“Many of our international partners have said that they are ready to contribute to the IMF resource increase but first the Europeans need to take decisions to show that they are themselves able and willing to reinforce their own financial backstops,” Mr Rehn said.
These discussions come as the IMF decides how much money it will provide for the second Greek bailout. European officials said the IMF contribution is likely to be significantly less than the one-third share of loans it made in the first Greek bailout and the Irish and Portuguese rescues.
“As soon as the prior actions agreed with the Greek authorities are implemented and adequate financial contribution from the private sector is secured, I intend to make a recommendation to our executive board regarding IMF financing to support a programme,” said IMF chief Christine Lagarde.
She successfully resisted European pressure in the talks to dilute the IMF’s debt reduction target for Greece under the new rescue.
A study by the troika said the arrangements on the table on Monday might leave Greece with a national debt of 129 per cent of national output by 2020, greatly in excess of the 120 per cent target.
The picture changed, however, as Greece’s private creditors agreed to increase their contribution, leaving Greece with a 120.5 per cent forecast under the deal.
Diplomatic sources said negotiators from the IIF banking lobby had to be told four times on Monday night that their offers were unacceptable before they finally yielded. The deal saw creditors accept a 53.5 per cent nominal “haircut” on their bonds instead of the 50 per cent reduction discussed for weeks..