Euro zone finance ministers aim to agree a second financing package for Greece on Monday, a decision they hope will boost market confidence in euro zone public finances and help contain the two-year-old sovereign debt crisis.
A deal for Greece would include agreement on official new financing, the size of voluntary losses banks and other private bondholders are willing to accept, and new reforms Athens must undertake.
This would end months of uncertainty over private sector losses on Greek bonds and over the sustainability of the country’s debt, now at 160 percent of GDP, which have increased costs of borrowing in many other euro zone countries.
Senior euro zone officials are expected to meet on Monday in Brussels, to prepare the package, which would then likely be submitted for approval by euro zone finance ministers at an extraordinary meeting later in the day.
“We are very far in the negotiations and we should be able to close them in the coming days,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in The Hague.
“We are negotiating a second program for Greece. The ball is now in the Greek court to agree to do its job concerning the prior actions,” Rehn said, referring to Greek reforms. EU leaders agreed in October they would lend Greece another 130 billion euros, assuming investors would forego half of what Greece owes them in nominal terms. But talks on the terms of those losses – called private sector involvement or PSI – have moved on since then and the chief executive of Deutsche Bank said bondholders were now ready to lose 70 per cent of the net present value of their investment.
Luxembourg’s Jean-Claude Juncker, the chairman of the Eurogroup countries, described the talks between the Greek government and private sector creditors – banks and insurance companies that own Greek government debt – as “ultra-difficult.”
Juncker also said the outcome of the leaders’ summit on January 30 was “largely insufficient” when it came to tackling the sovereign debt crisis and that further steps would be needed to tighten fiscal rules for the 17 euro zone countries.
The euro zone leaders called for rapid agreement on the second package that is to keep Athens financed through 2014 after the previous, 110 billion euro bailout runs out this year.
The focus is now on what additional reforms Athens would have to undertake in return for the new help and how much euro zone governments and institutions would contribute to the effort to make Greek debt sustainable at 120 per cent of GDP in 2020.
“It is all linked. The PSI cannot be agreed without the rest of the package, since PSI needs to be financed from the official financing contribution to the second program,” said to Reuters one euro zone official with knowledge of the talks.
Leaders have earmarked 30 billion euros of the 130 billion promised in October as a sweetener for the bond swap that carries out the PSI side of the deal.
Meanwhile, prime minister Lucas Papademos faces his toughest challenge since he assumed his role last November, as he was prepares to meet with the leaders of the three parties in the shaky coalition and win their backing for additional austerity measures that are a prerequisite for a second bailout for Greece.
Pressure is growing on the party leaders to agree on the new measures and finalise the broad strokes of an economic program before a scheduled summit of eurozone finance ministers on Monday.
According to sources, Papademos is angry at the stance of several ministers and cadres of parties in the coalition that have held up talks. There are significant concerns in government circles that the party leaders will not sign up to all the troika’s demands, paving the way for a new round of negotiations with foreign envoys and putting crucial rescue funding in jeopardy.
The major issues on the table of talks with party leaders will be proposed cuts to the so-called 13th and 14th annual salaries, cuts to auxiliary pensions, the recapitalisation of Greek banks (and whether such a process should grant voting rights to the state), as well as demands by foreign creditors for written commitments by the three leaders.
Conservative New Democracy, which is leading in the polls, and the right-wing Popular Orthodox Rally (LAOS) have both opposed cuts to the 13th and 14th salaries outright, while Socialist PASOK wants the recapitalisation of banks to include voting rights. Apparently, it is not only political dissent that is delaying a deal.
According to the Wall Street Journal, a rift between the IMF and Germany is stalling the process.
The Washington-based Fund reportedly believes that a deal will also require sacrifices from the European Central Bank and national governments.
Germany, meanwhile, objects to official sector involvement, the WSJ reported.