Euro zone finance ministers inched towards approving a second bailout for debt-laden Greece on Monday that would resolve Athens' immediate repayment needs but seems unlikely to revive the nation's shattered economy. Agreement on a 130-billion-euro rescue package on strict conditions would draw a line under months of uncertainty that has shaken the currency bloc, and avert imminent bankruptcy.
As the ministers met, officials were struggling to make the numbers add up. EU sources said they had to cut a further 6 billion euros, via various means, to make the financing work, and private investors might have to take bigger losses than the planned 50 percent nominal writedown on their bonds.
Diplomats and economists say a deal may only delay a deeper default by a few months. A turnaround could take as much as a decade, a bleak prospect that brought thousands of Greeks onto the streets to protest against austerity measures on Sunday.
French Finance Minister Francois Baroin said all the elements were in place to reach an agreement and Greek Finance Minister Evangelos Venizelos said he expected a deal. But the talks were expected to run late into the night. "We expect today the long period of uncertainty - which was in the interest of neither the Greek economy nor the euro zone as a whole - to end," Venizelos said in a statement.
Dutch Finance Minister Jan Kees de Jager, the most outspoken of Greece's northern creditors, insisted that the Netherlands could not approve the rescue package until Greece had met all its obligations. But the chairman of the Eurogroup, Jean-Claude Juncker, said Athens had met all the prior conditions demanded of it.
Finland, another stern creditor, signed a side-deal with Greece for Greek banks to provide collateral in cash and highly rated assets in return for Finnish loan guarantees, removing one long-running obstacle. Euro zone ministers need to agree new measures to make the financing work, given the ever-worsening state of the Greek economy. That may involve lower interest rates on official loans and an indirect contribution from the European Central Bank and euro zone national central banks.
An agreement will enable Greece to launch a bond swap with private investors to help reduce and restructure Athens' vast debts, put it on a more stable financial footing and keep it inside the 17-country euro zone. A Greek finance ministry source said last-minute negotiations were continuing with bank creditors on possible higher writedowns to help plug the funding gap.
DOUBTS OVER COMMITMENT Sceptics question whether a new Greek government will stick to the deeply unpopular programme after elections due in April, and believe Athens could again fall behind in implementation within months, prompting exasperated lenders to pull the plug once the euro zone has stronger financial firewalls in place.
Several thousand Greeks demonstrated on Sunday against the austerity measures to reduce the country's debt, although the numbers were much lower than protests a week earlier which say building in Athens torched and looted. While there are doubts in Germany and other countries that Greece will be able to meet its commitments, including implementing 3.3 billion euros of spending cuts and tax increases, officials said momentum was building for a deal.
A euro zone official in contact with deputy ministers who took part in a preparatory Sunday meeting said the financing gaps were not so large that they risked derailing the process. "I don't see anybody wanting to be responsible for pulling the plug on the deal at this late stage," he said.
European shares hit a seven-month high and the euro rose on Monday as expectations of an agreement boosted investor appetite for riskier assets. Greek Prime Minister Lucas Papademos and International Monetary Fund Managing Director Christine Lagarde were attending the Brussels talks in a sign they were likely to be decisive.
Under one crucial element of the deal, Greece will have around 100 billion euros 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 percent 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 14.5-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 ensure Greece's banking system remains stable: 30 billion euros will go to "sweeteners" to get the private sector to sign up to the swap, 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. Those numbers could change during Monday night's talks given the scramble to meet the overall objective of reducing Greece's debts from 160 percent of GDP to around 120 by 2020 - the figure and timeframe the IMF, ECB and the European Commission, together known as the troika, have established as sustainable.
MEETING THE TARGET A debt sustainability report delivered to euro zone finance ministers last week showed that without further measures, Greek debt would only fall to 129 percent by 2020. The IMF has said if the ratio cannot be cut to near 120 percent, it may not be able to help finance the bailout. US Treasury Secretary Tim Geithner urged the IMF to do its bit.
A number of measures, including restructuring the accrued interest portion, reducing the "sweeteners" and having euro zone national central banks take part in the debt swap are being considered to move the figure closer to 120. 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.
The ECB could also decide to forgo the profit on around 40 billion euros of Greek bonds it holds to lower Athens' burden. Sources involved in the preparatory meeting on Sunday said a combination of the measures was likely to be used to reduce the gap to between 129 percent and about 120 percent. "If we can get it down to 123 or 124 percent, I think everyone's going to be okay with that," the euro zone official said. "Everyone will find a way to tweak the numbers."
A deal would provide immediate relief to Athens and financial markets but no one is pretending it will end Greece's problems. Figures last week showed its economy shrank 7 percent year-on-year in the last quarter of 2011, much more than expected, with further cuts likely to make matters worse. In an implicit challenge to Franco-German leadership in the euro zone, a group of 12 countries led by Britain, the Netherlands and Italy urged a shift towards promoting growth by opening up the EU's internal market for services. Berlin and Paris did not sign the joint letter to heads of the EU institutions calling for a new economic agenda. The troika, responsible for monitoring Greece's reform progress, carries out quarterly reviews and could decide Athens is not meeting its commitments at any one of them.
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