Finance ministers from the Euro zone and the International Monetary Fund patched up their differences over a bailout for Greece early Tuesday with a spate of measures bringing closer the release of long-delayed emergency aid.
The parties reached the deal after their third meeting in three weeks aimed at finding alternative ways of giving Greece relief in light of opposition by creditors like Germany and the Netherlands to so-called haircuts that would involve forgiving some Greek debt.
The decisions "will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece," Mario Draghi, the president of the European Central Bank, said as he left the meeting.
|GREEK DELIGHT |
After their third meeting in three weeks, EU finance ministers and the IMF reached a deal aimed at finding alternative ways of giving Greece relief
|Euro 43.7bn ($56.7bn): Loan installments unlocked for Greece |
- IMF pressed ministers to agree that Greece's debt be cut by about 20 per cent of GDP through methods including the debt buyback programme at discounted prices, lowering interest rates, lengthening the deadlines for debt repayments, and returning profits to Greece made on bonds bought by the European Central Bank
- IMF compromised by loosening its debt target to about 124 per cent of Greece's gross domestic product by the end of the decade. The fund had been insisting on a target of 120 per cent by 2020
- Greek debt is now estimated at 175 per cent of GDP, and its economy could shrink again, pushing the figure to 190 per cent next year, and up to 200 per cent by 2014
- Ministers laid out options for making Greece's debt more manageable - including lowering interest rates on bilateral loans made to Greece by 100 basis points
For Greece, the agreement means Euro zone ministers have unlocked loan installments totaling Euro 43.7 billion ($56.7 billion). Most of that money would start to be paid out in December, with further payments during the first quarter of next year on the condition that Greece continued to fulfill its pledges under the bailout plan.
"Greece has already come a very, very long way and tonight the Eurogroup has rightly recognised that," said Olli Rehn, the European commissioner for economic and monetary affairs, referring to the group of finance ministers who met here.
But officials, including Wolfgang Schauble, the German finance minister, said the payout would be made only once one part of the agreement - a debt buyback - had been completed.
During the talks, which lasted about 12 hours, the IMF pressed ministers to agree that Greece's debt should be cut by about 20 per cent of GDP through methods that include the debt buyback programme at discounted prices, lowering interest rates, lengthening the deadlines for debt repayments, and returning profits to Greece made on bonds bought by the European Central Bank.
In exchange, the IMF compromised by loosening its debt target to about 124 per cent of Greece's gross domestic product by the end of the decade. The fund had been insisting on a target of 120 per cent by 2020.
Christine Lagarde, managing director of the IMF, emphasised at a news conference that agreement had also been reached to ensure Greek debt was "substantially lower" than 110 per cent of GDP by 2022.
"What remains to be done is a lot of nitty-gritty work, of course - national parliaments are going to have to consult with their respective authorities," said Lagarde, referring to steps that needed to be taken to release aid beginning next month.
The haggling has been going on against the background of a financial catastrophe unfolding in Greece, where the economy has shrunk by about one-fifth in three years and unemployment is hovering around 25 per cent.
The unrelenting gloom means suffering for the Greek public and also made it more improbable that the country can pay its debts in full.
The seemingly endless round of meetings over Greece has been a sign that after nearly three years of crises, the politicians are still trying to contain contagion in the Euro zone, which began with a huge hole in Greek accounts, even as that country's debt prospects continue to worsen.
In June, creditors froze aid from the current program, valued at Euro 130 billion ($169 billion), after determining that Greece was failing to meet the conditions of that bailout, its second. Since then, "Greece has fully delivered its part of the agreement, so we expect our partners to deliver their part, too," Yannis Stournaras, the Greek finance minister, said Monday before the meeting.
But because of factors like worsening economic conditions, delays to fiscal reforms and disappointing earnings from the privatisations of state companies, Greek debt is now estimated at 175 per cent of GDP, and its economy could shrink again, pushing that figure to 190 per cent next year, and even up to 200 per cent by 2014.
The negative outlook has made earlier calls by the IMF that Greece pare its debt to 120 per cent of gross domestic product by 2020 look unfeasible under current plans. That led the IMF to increase pressure on major creditors like Germany to take politically unpalatable losses, or haircuts, on their holdings of Greek debt to keep the country in the Euro zone.
The result had been a standoff, with Germany trying to keep the bill for Greece as low as possible at least until after the German elections in 2013.
Under the deal reached Monday, ministers laid out a range of options for making Greece's debt more manageable - including lowering interest rates on bilateral loans made to Greece by 100 basis points.
The two sides took weeks to reach their deal because of conflicting views about how quickly Greece can grow its economy, lure investors, pay down its towering debt and return to the markets to borrow money once aid programs expire later this decade.
Since June, the Greek economy has worsened and social problems in the country have become more acute as unemployment has climbed. Those factors have already led Greece's lenders to agree that the government in Athens will need two years longer than previously agreed, or until 2016, to meet its budget targets.
But that concession will cost more money because of a range of factors, including revenues from privatisations that will not be as large as expected. The cost could come to nearly Euro 33 billion ($43 billion) on top of existing bailouts to help Greece reach its budget targets.
The prospect of paying more to Greece perturbed some lenders, particularly Germany, where transferring more wealth to the poorer-performing economies of Southern Europe is politically risky, particularly as Chancellor Angela Merkel prepares for a re-election fight next year.
Those concerns were on display over the weekend. Jorg Asmussen, a member of the European Central Bank's executive board, told the German newspaper Bild that a write-down of Greek debt should not be part of the deal, echoing repeated statements from Schauble, the German finance minister, who said it would be illegal.
On the other side was the IMF, which has insisted that fresh money, or even a write-down, will be needed to put Greece on a path to manageable debt by the end of the decade. By its own rules, the IMF can lend money only if the debt is "sustainable" or can be paid back by a recipient country, like Greece.