20 September 2012

WSJ: Fight looms on Greek bailout

A report by international inspectors, due in October, will state how big the funding shortfall is in Greece's bailout programme, but European officials say the deficit is far too big for Greece to close on its own. That means the International Monetary Fund, the European Central Bank, and eurozone governments such as Germany will have to negotiate over which of them will make painful concessions to ease Greece's debt-service burden. That is intended to avoid a Greek bankruptcy that could force the country out of the euro and reignite financial panic across the currency bloc.

Northern creditor countries, led by Germany, the Netherlands and Finland, are adamant that Greece won't get more loans from them. Such loans would require the approval of Germany's parliament, where Chancellor Angela Merkel fears many of her centre-right allies would revolt, causing a government crisis.

Some eurozone officials would like the ECB to extend the duration of Greek government bonds that it holds, or to promise to buy new bonds when existing ones mature, reducing Greece's need for money. But many ECB officials strongly oppose such concessions, equating them with illegal central bank financing of government debt.

The ECB is already facing accusations from the German Bundesbank that its offer this month to buy more bonds of struggling euro members such as Spain and Italy amounts to "monetary financing" of governments. That makes it less likely the ECB will show further flexibility toward Greece.

One option being discussed is for eurozone governments to write off some or all of the €53 billion in bilateral loans that they lent Greece under its first aid programme in May 2010. However, Germany and France aren't keen on taking such a large hit.

Full article

© Wall Street Journal