European governments moved toward a second rescue of Greece, calculating that the 130 billion-euro ($172 billion) cost of a fresh bailout is a price worth paying to prevent a default that could shatter the euro area.
Finance ministers haggled into the night in Brussels over the terms of new loans to Greece and a possible contribution by central banks, and leaned on investors to accept bigger write- offs in a bond exchange that is vital to staving off a Greek bankruptcy next month. Prospects for reaching a deal are good, though more talks are necessary, a European diplomat said.
Bondholders’ response to the swap, Greece’s ability to prolong two years of austerity, and a series of parliamentary approvals in northern European countries gripped by an anti- bailout mindset loom as risks to the latest salvage operation.
“We still have a bit of work to do,” German Finance Minister Wolfgang Schaeuble told reporters yesterday as he arrived for the meeting of euro-area finance chiefs. “We’ve set out to wrap up the decision on a new aid program for Greece. I’m confident.”
No time was set for a press conference after the meeting, which began at 3:30 p.m. yesterday. The euro dipped as the bartering dragged on. It bought $1.3220 at 2 a.m. Brussels time, down from as much as $1.3277 yesterday.
Euro leaders point to declining bond yields in Italy and Spain as evidence that investors are less fearful that the turmoil in Greece, representing 2.4 percent of the continental economy, will spill across borders.
Finance chiefs from the 17 euro nations convened two years and nine days after Greece’s fiscal woes prompted a summit-level pledge of “determined and coordinated action, if needed” to safeguard the currency.
Since then, creditor countries and Greece have sought leverage over each other. Rich countries led by Germany have tied aid to ever-stricter conditions, while Greece counts on Europe’s fear that letting it go bust would destabilize, and possibly wreck, the 13-year-old monetary union.
Finance ministers tried to make Greece’s aid numbers add up, considering lower interest rates or longer loan maturities to bring Greek debt down to a target of 120 percent of gross domestic product in 2020, two officials said last week.
Unchanged terms would leave the debt at 129 percent of GDP by 2020, too high to be “sustainable,” according to European and International Monetary Fund estimates that were first shown to the ministers on a Feb. 15 conference call.
Greece’s debt might balloon to as much as 160 percent of GDP by 2020 if the economy fails to rebound, the selloff of state assets falls short of targets and bureaucratic snags stall reforms, the European-IMF analysis showed.
“Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it,” the analysis concluded.
By midnight, the ministers were looking to settle for Greek debt in the range of 123 percent or 124 percent of GDP as long as bondholders offer greater-than-planned debt relief, said an Italian government official who declined to be named.
Previously, investors offered to take a net present value loss of 70 percent on Greek bonds. Greek Prime Minister Lucas Papademos led the bargaining with the bondholders, represented by Charles Dallara and Jean Lemierre of the Institute of International Finance.
European governments need to weld together the program to give enough time for the bond exchange -- designed ultimately to write off about 100 billion euros of Greek debt -- to go ahead by a mid-March deadline.
The target is for the swap offer to run from Feb. 22 to March 9, so the exchange takes place in time for Greece to escape the full 14.5 billion-euro cost of a March 20 bond redemption, German lawmakers were told last week by government officials.
“We are here today ready to conclude this long process,” Greek Finance Minister Evangelos Venizelos said. “I am optimistic, but in any case we need a clear political approval.”
Also up for debate at the meeting, attended by European Central Bank President Mario Draghi, is the role of the politically independent ECB and its national branches in the bailout that follows 110 billion euros awarded in May 2010.
The ECB could funnel profits from crisis-driven purchases of Greek bonds back to national governments and on into the Greek package. Such a maneuver would knock 5.5 percentage points off Greece’s debt by 2020, the debt analysis showed.
Another option is for national central banks to join private investors in taking losses on Greek bonds held in their investment portfolios. That would cut Greece’s 2020 debt by 3.5 percentage points, according to the analysis.
Central-bank contributions and bigger-than-planned write- offs by private bondholders would be two ways of drumming up the extra funds, Austrian Finance Minister Maria Fekter said.
“Governments can’t make more tax money available -- that would overburden the states,” Fekter told reporters. “We in Austria would have problems getting it through parliament.”
Fekter said she is also on guard against the IMF springing a surprise tonight by cutting its share of the Greek loans from its previous practice of delivering one third of the total.
Christine Lagarde, who was French finance minister when the crisis began and took over the IMF last year, declined to say how much the Washington-based fund will steer toward the new package.
“Greece has manifestly made very significant strides and now the work has to go on,” Lagarde said on her way in. “The IMF is here to be part of the work.”
Frustrated with Greece’s inability to meet two years of targets for cutting the deficit and selling off state assets, donor countries are also insisting on more control over how Greece spends the money.
Germany’s Schaeuble said Greece accepts the idea of paying the international funds into a special account, which would give priority to keeping Greece solvent before releasing money for the country’s budget.
“I am myself in favor of a permanent troika in Athens,” Dutch Finance Minister Jan Kees de Jager said before the Brussels meeting. “When you look at the derailments in Greece which have occurred several times now, it is necessary that there is some kind of permanent presence.”
Greece upheld part of its side of the bargain by spelling out 325 million euros in additional spending cuts, the latest of the unpopular measures that have provoked street protests in Athens.
The Greek economy shrank 7 percent in the fourth quarter from a year earlier as unemployment surged past 20 percent in November. The country’s output is forecast to shrink for the fifth straight year.
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