Europe Prepares for More Greek Aid as German Election Approaches

Photographer: Chris Ratcliffe/Bloomberg

The European Union targets Greek debt to fall to 124 percent of gross domestic product in 2020, from a peak the International Monetary Fund now sees at 176 percent of GDP this year. Close

The European Union targets Greek debt to fall to 124 percent of gross domestic product... Read More

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Photographer: Chris Ratcliffe/Bloomberg

The European Union targets Greek debt to fall to 124 percent of gross domestic product in 2020, from a peak the International Monetary Fund now sees at 176 percent of GDP this year.

European officials are laying the political groundwork for fresh Greek aid as Chancellor Angela Merkel, who has led bailout-weary Germany throughout the region’s debt crisis, battles to win a third term in office.

German Finance Minister Wolfgang Schaeuble said yesterday for the first time that there “will have to be a program for Greece once again,” referring to previous euro-area pledges to provide “further measures and assistance” to ease the country’s debt burden.

European Union Economic and Monetary Affairs Commissioner Olli Rehn said today that the “possible continuation of Greece’s bailout program and its financing” will be assessed after a review next month by the so-called troika that oversees euro-area bailouts. European Central Bank Executive Board member Joerg Asmussen is in Athens to gauge the government’s progess on economic reforms.

More than three years after its first 110 billion euro ($147 billion) rescue, question marks remain over Greece’s ability to pay its bills. The country is mired in the sixth year of a recession that has left six in 10 young people without work. The International Monetary Fund predicts the economy will contract 4.2 percent this year before returning to growth in 2014.

Merkel’s chief challenger in the Sept. 22 election, Social Democratic candidate Peer Steinbrueck, said Schaeuble’s admission was proof the government’s policies aren’t working.

“More aid for Greece is a toxic topic for an election campaign, but I think it’s realistic,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “Assumptions in Greece’s second aid package were rather optimistic, and the country’s debt ratio is back at the levels when we talked about the last haircut.”

The EU targets Greek debt to fall to 124 percent of gross domestic product in 2020, from a peak the International Monetary Fund now sees at 176 percent of GDP this year. Euro-area finance ministers said in November that they’d consider additional relief if Greece meets its existing program conditions, including achieving a primary budget surplus.

Bond Purchases

“The Greeks need until 2020 until they have re-established debt sustainability according to the calculations we made,” Schaeuble said. “We will have to help them again so that they don’t have to pay such high interest rates for this maturity.”

In their November statement, euro-area finance chiefs mentioned an interest-rate reduction on aid loans as a possible step to ease Greece’s debt burden, along with easing co-financing terms for EU structural funds.

Euro-area nations also pledged to pass on profits from central bank bond purchases that were conducted as part of the ECB’s first bond-buying plan. The first of these payments changed hands last month, when Greece received 1.5 billion euros along with the latest installment from the second bailout package.

While those funds keep Greece liquid until after the German election, IMF staff in July said 4.4 billion euros of funding for 2014 has yet to be identified. Most of Greece’s debt is now held by its euro partners and the IMF after investors took part in the biggest debt restructuring in history last year.

Third Bailout

“The next step is a troika review that will take place in the autumn,” European Commission spokeswoman Chantal Hughes said today. “This will look at Greece’s economic situation in more detail and also at implementation of the Greek program.”

Merkel’s chief spokesman, Steffen Seibert, said today that Schaeuble’s comments on Greece referred to the existing aid program schedule for Greece.

As for the possibility of a third bailout program for Greece, Merkel said she couldn’t say how much might be needed. “I can’t name or confirm an amount,” she said on Sat.1 television. “We will be able to tell only in the middle of next year.”

To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Rebecca Christie in Brussels at rchristie4@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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