European finance ministers saluted Greece’s determination to trim its budget and reshape its recession-wracked economy, smoothing the way for German Chancellor Angela Merkel’s trip to Athens with a commitment to keeping the country in the euro.
European officials paired the encouragement with a demand that Greece commit to a list of 89 policy steps before an Oct. 18-19 leaders’ summit, and left open whether the next 31 billion-euro ($40 billion) loan installment would be paid out in one go or dribbled out in smaller pieces.
Creditors muffled doubts about Greece’s fiscal health hours before Merkel, the dominant figure in Europe’s bailout politics, set off to brave anti-austerity protests on her first trip to Greece since the crisis broke out in October 2009.
“I’m impressed by the performance of the Greek government, by the willingness of the coalition parties in Greece to undertake whatever will have to be undertaken in order to respond to our wishes,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Luxembourg late yesterday after chairing a meeting of euro finance chiefs.
The Luxembourg meetings are continuing today with all 27 European Union finance ministers debating proposals for a joint euro-area bank supervisor. Merkel meets Greek political and business leaders in Athens in the afternoon, with 7,000 police officers deployed to prevent the demonstrations from turning violent.
Juncker’s cheerleading and Merkel’s visit mark a show of support for Greek Prime Minister Antonis Samaras, who campaigned against deeper budget cuts, only to embrace them after taking office as the only way to keep Greece in the 17-nation euro zone.
Samaras’s coalition is deliberating internally and wrangling with the creditors to put together 13.5 billion euros in savings, the condition for unlocking the next set of loans from two packages totaling 240 billion euros.
“Clearly there is progress on the ground,” International Monetary Fund Managing Director Christine Lagarde said. “More needs to be done.” She said representatives of the IMF, European Commission and European Central Bank will continue the negotiations in Greece instead of taking a break for this week’s IMF meetings in Tokyo.
Two More Years
New IMF forecasts put Greece’s debt at 182 percent of gross domestic product in 2013, up from an April forecast of 161 percent and making it harder to reach a target of 120 percent by 2020.
Greece wants two additional years, until 2016, to meet the deficit-reduction targets set by creditors, Finance Minister Yannis Stournaras said. The extra time would create a “funding gap” of 12 billion euros that wouldn’t cost creditors anything because Greece could, for example, continue higher-than-planned sales of bills to fill the hole, he said.
“It is not a problem that cannot be tackled,” Stournaras said. “There are many technical ways.”
The scoldings that Greece once faced were reserved yesterday for Cyprus, bidding for its own bailout since June 25 with little progress due to the minority government’s inability to force through budget cuts ahead of next year’s election.
Cyprus, its banks hammered by last year’s European decision to write down Greek debt, has also sounded out Russia for a loan, potentially as a ploy to extract a better deal from European governments. Moody’s Investors Service heightened the pressure late yesterday, downgrading Cyprus’s bond rating to B3 from Ba3.
“We unanimously felt there is a need to accelerate work,” Juncker said. French Finance Minister Pierre Moscovici added: “It’s vital and there’s no time to be lost; this situation must be clarified.”
In a sign of the lenient spirit that may benefit Greece as well, the ministers allowed Portugal to go into overtime on deficit reduction. Portugal’s deficit target was lifted to 5 percent of GDP from 4.5 percent for 2012, and to 4.5 percent of GDP from 3 percent for 2013.
The next 4.3 billion euros of Portugal’s package -- worth a total of 78 billion euros -- were also cleared for release. Those loans will come from the euro area’s temporary bailout fund, a separate pool of EU funds and the IMF.
Permanent Aid Fund
Finance ministers also declared operational the permanent aid fund, the 500 billion-euro European Stability Mechanism. It will replace the temporary European Financial Stability Facility, which has committed 192 billion euros of its 440 billion euros to Ireland, Portugal and Greece. The two funds will run in parallel until the EFSF is phased out in mid-2013.
The permanent fund’s birth was eased by the ECB’s offer in August to buy bonds of fiscally struggling countries, which has driven down interest rates in Spain and Italy and bought European governments time to address the root causes of the crisis.
Spanish 10-year bonds yielded 5.75 percent at 11:20 a.m. Luxembourg time, down from a peak of 7.62 percent on July 24. Italian 10-year yields have fallen to 5.08 percent from 6.60 percent and the euro has risen 7.2 percent to $1.2928 over the same period.
Finance ministers touted Spain’s economic overhaul, declined to press the Spanish government for more budget cuts and said a bank-aid program set up in July will cost far less than the 100 billion euros allocated for it. Payouts under that program will be handled by the ESM starting in November.
For now, Spain says the bank-aid money is all it needs. It is hesitating over seeking a broader package that would involve the rescue fund buying Spanish bonds at auction and the ECB scooping up Spanish debt on the open market.
“Spain is also suffering under the problem of contagion, like other countries, from speculation that’s the result of the uncertainty surrounding the euro area as a whole,” German Finance Minister Wolfgang Schaeuble said. “But Spain doesn’t need an assistance program.”
Street protests and three regional election campaigns have played into the Spanish government’s decision to hold off seeking a full aid package. While Spain is awaiting a clearer sense of what Europe would want in return, it ruled out further budget cuts.
Spanish Economy Minister Luis de Guindos defended the 2013 budget draft against assertions by the Spanish central bank and some European officials that it relies on optimistic economic assumptions in order to squeeze the deficit down to a European target of 4.5 percent of GDP.
“The budget for next year has been put on the table, it is a significant effort in terms of budget adjustment,” de Guindos told reporters in Luxembourg.