Greece on verge of bailout deal

21 Feb 2012, 12:00 am   -   Source: AAP
Hundreds of police shadowed the latest demonstrations, held a week after parliament passed new austerity measures. (File:AAP)

Hundreds of police shadowed the latest demonstrations, held a week after parliament passed new austerity measures. (File:AAP)

Finance ministers in Brussels have a few last issues to wrangle over, such as tighter controls over Greece's spending and further cuts to the debt load.

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Eurozone governments are likely to approve a long-elusive rescue package for Greece, saving it from a potentially calamitous bankruptcy, senior officials say.

But finance ministers meeting in Brussels on Monday have a few last issues to wrangle over, such as tighter controls over Greece's spending and further cuts to the country's debt load.

Greece needs to secure the 130-billion-euro ($A160 billion) bailout quickly so it can move ahead with a related 100-billion-euro debt relief deal with private investors, which needs to be in place if Athens is to avoid defaulting on a bond repayment on March 20.

An uncontrolled bankruptcy would likely force Greece to leave the 17-country currency union and return to its old currency, the drachma, further shaking its economy and creating uncertainty across Europe.

French Finance Minister Francois Baroin told Europe-1 radio on Monday that while details will have to be worked out, "the political commitments have been made" for the bailout package, Greece's second in two years.

"We now have all the elements of a deal - elements of a participation that remains voluntary for banks and private lenders, and for public lenders states, central banks," Baroin said.

He was on his way to Brussels to meet his counterparts from the 16 other euro countries, as well as representatives for the International Monetary Fund, the European Central Bank and private holders of Greek debt.

Greece's finance minister, Evangelos Venizelos, who arrived in Brussels on Sunday night, said he was optimistic the new aid program could be agreed.

"Greece comes into today's Euro group meeting having fulfilled all the requirements for the approval of the new program," he said.

"For Greeks, this is a matter of national dignity and a national strategic choice and no other integrated and responsible choice can be opposed to it."

The Greek parliament has faced down violent protests in Athens and nationwide strikes to approve the austerity and reform measures demanded by the eurozone.

Its main political leaders have committed in writing to uphold the bailout terms even after general elections in April.

Despite Athens' efforts, however, several important elements of the deal remained unsolved.

To convince the rest of the eurozone that the new aid money will not be squandered, Greece will have to set up a separately managed account to ensure it services its debt.

The account would give legal priority to debt and interest payments over paying for government services.

Eurozone finance ministry officials on Sunday night concluded that only funds from the bailout would be funnelled through the account and that Greece would not be required to pay in taxpayer money, German Finance Ministry representative Marianne Kothe said in Berlin.

The escrow account nevertheless would be an unprecedented intrusion into a sovereign state's fiscal affairs and could ultimately see Greece forced to pay interest on its debt rather than its teachers, doctors or other government employees.

A Greek official indicated Monday that "many problematic and unenforceable" elements had been taken off the table, but declined to elaborate. The official was also speaking on condition of anonymity because the talks were ongoing.

The second big outstanding issue is how to make sure that the current efforts to save Greece can actually bring the country's debts down to a manageable level in the longer term. In October, eurozone leaders and the IMF said Greece's debt should be reduced to around 120 per cent of annual economic output by 2020, from above 160 per cent currently.

But a new report prepared by the European Commission, the ECB and the IMF concluded that the new bailout, Athens' spending cuts and a planned 100 billion euros debt relief from private investors would still leave Greece's debt at almost 129 per cent of economic output by the end of the decade.

The eurozone is still discussing several ways to close this financing gap.

The Greek official said there appeared to be agreement on further reducing the interest rate on Greece's first 110 billion euros bailout as well as having national central banks in the eurozone, which also hold some Greek bonds, participate in the debt relief.

But the official said that there was still no final decision from the ECB on whether it would be willing to transfer profits from its Greek bond holdings back to Athens.

In contrast to the national central banks, who purchased Greek bonds as part of their overall investment strategies, the ECB bought its Greek holdings in an effort to ease market pressure on Athens.

A forth option for closing the gap would be to demand further losses from Greece's private bondholders like banks and other investment funds. A current plan foresees private creditors swapping their old Greek bonds for new ones with half the face value, lower interest rates and much longer repayment periods.

But now there is a push for bondholders to also give up on an accrued interest payment of around 5.5 billion euros on their old bonds.

Another issue due to be discussed on Monday is how much the IMF will contribute to the new rescue. The Washington-based fund has provided one third of the bailouts for Ireland and Portugal and chipped in 30 billion euros for Greece's first rescue. But this time around, it looks as if the IMF will put up much less than one-third.

The US has expressed support for the IMF to take part in an aid program for Greece.

"This is a very strong and very difficult package of reforms, deserving of support of the international community and the IMF," US treasury chief Timothy Geithner said in a statement on Sunday. "The United States will encourage the IMF to support this agreement."

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