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21 November 2012

FT: German doubts force rethink on Greece


German objections to suffering losses on official loans to Greece have forced the eurozone to explore more complex means of helping Athens cope with its debt mountain.

The eurozone finance ministers failed to agree on how fast to cut Greece’s debt pile. They called a further meeting next week to settle differences and release €44 billion of long-overdue aid. The main stumbling block was Berlin’s refusal to back “illegal” cuts to the interest rates on bilateral loans to Greece or return the profits from the European Central Bank’s purchases of Greek bonds, said people involved in the talks.

An alternative proposal involves offering €10 billion of extra loans to Athens from the European Financial Stability Fund, the eurozone’s temporary bailout pot. The option is seen as a leading contender for a compromise deal. This extra lending would support a more ambitious scheme to purchase Greek bonds held by private investors, part of a package of debt relief measures to bring down Athens' debt to significantly below 120 per cent of economic output by 2022.

Sanctioning a new €10 billion of bailout loans would pose a considerable political challenge to several countries and require the backing of restless parliaments in Germany, Finland and the Netherlands. In part to address the inevitable political concerns, officials are drawing up options to back the new loans with collateral from Greece’s privatisation programme, which aims to raise €50 billion.

Berlin’s demand that any new measures must not represent a fiscal transfer to Greece – which the German government sees as illegal – means that the degree of support given will vary country by country.

The IMF, which has clashed publicly with the Eurogroup recently over providing financing for Greece, continued to resist prematurely giving its assent to a package that did not fill the financing gap. But it did not insist on a rigid target of reducing Greek debt to 120 per cent of GDP by 2020 – a point that recently sparked a public spat between Christine Lagarde, the IMF’s managing director, and Jean-Claude Juncker, chairman of the Eurogroup.

Full article (FT subscription required)



© Financial Times


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