14 February 2012

WSJ: Europe struggles over Greek details

European Union negotiators have yet to settle key elements of a complex bailout and debt-restructuring package for Greece — including how eurozone governments will contribute to a desired cut in the country's debt burden.

Central to the negotiations is resolving the thorny issue of how Greece's official creditors in Europe—other eurozone governments and the European Central Bank—should participate in the debt restructuring. Eurozone leaders are expected to make the final decision on the new bailout at their summit in March.

That would be one of the final pieces of the puzzle to fall into place to allow approval of at least €130 billion in bailout loans from the eurozone and the International Monetary Fund that should avert a potentially chaotic Greek debt default next month.

Germany and Greece's other official creditors have sought to tie the hands of Greek politicians after elections expected in April, seeking assurances they will back the unpopular package after then. But in his public statements, the man that opinion polls suggest will be the likely next prime minister, Antonis Samaras of the New Democracy party, has delivered less than wholehearted backing for the programme.

A crucial question confronting negotiators in Brussels is whether to stick to a target set by eurozone leaders in October for reducing Greece's debt burden, now about 160 per cent of GDP, to "around" 120 per cent of GDP in 2020. Officials said the target may be lifted to no more than 125 per cent of GDP as part of a final deal.

Both the governments and the eurozone's central banking system are expected to give Greece some debt relief to ensure its debt falls below the 125 per cent target in 2020. On the table is a trade-off: The governments would agree to lower the interest rate on the loans made to Greece under the bailout it received in May 2010, and in exchange the ECB or the national central banks would agree to have their holdings of Greek bonds repaid at below their full face value.

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