EU Links Greece Aid to Budget Cuts

WSJ 21-06-2011

Greece will get its next quarterly installment of bailout money only if the country's Parliament passes a contentious package of budget measures, European finance ministers said after a two-day meeting in Luxembourg.

They also made long-planned changes to the euro zone's bailout funds.

The ministers deferred any final decision on the installment payment until early July, after the vote in Parliament, and showed modest signs of progress toward a broader agreement for a bigger package of aid to Greece for coming years. They set another meeting for July 3.

French Finance Minister Christine Lagarde said France had initiated two conference calls with its counterparts in the Group of Seven—the U.S., Germany, Italy, Japan and the U.K.—to discuss Greece's economic troubles.

G-7 officials briefed on the calls, which took place late Sunday and Monday, said finance ministers expressed apprehension that Athens might not be able to deliver on the promised economic restructuring that its bailout loans are conditioned on. They also asked tough questions of their European colleagues and provided advice on how best to fix the plight, the officials said.

The U.S. Treasury declined to comment on the call.

In Greece, pressure is mounting on Prime Minister George Papandreou.

A vote on the austerity package is expected at the end of this month, but Mr. Papandreou must first survive a vote of confidence Tuesday.

In brief remarks late Monday after meeting with European Commission President José Manuel Barroso in Brussels, Mr. Papandreou said he was seeking the "widest possible consensus" in Parliament for the budget cuts that European authorities have demanded.

Mr. Papandreou added that Greece was facing "very difficult and complicated" negotiations over the package.

Mr. Barroso said in a statement that passage of the austerity measures was a "necessary condition" for more aid.

In Luxembourg, European finance ministers did spell out how they would increase the size of the EU's current temporary bailout fund, and decided on the final form of an agreement on the creation of a new bailout fund. It will go to national parliaments for ratification.

One change was a pleasant surprise for the EU's weakest countries: Finance ministers dropped their demand that new lending from the forthcoming European Stability Mechanism bailout fund be given preferred-creditor status that would ensure it is paid back before other, private lenders.

Those countries had warned that the preferred-creditor demand would make it much harder for the countries to return to the private markets to raise cash—which is the point of the bailout exercise.

The ESM won't come into being until 2013, and the three countries' bailout deals don't have the preferred-creditor features. But if they need more cash after 2013, it would likely come from the stability mechanism.

"It's good news for Greece. It's good news for Ireland. It's good news for Portugal," said Jean-Claude Juncker, the Luxembourg prime minister who also is chairman of meetings of euro-zone finance ministers.

Michael Noonan, the Irish finance minister, said his country had been lobbying to strip the preferred status for months.

"The change makes it possible now for Ireland to go back into the markets and be sure that there are people there who will lend us money," he said. He said investors had expressed worry about the status.

Leaders repeated that access to the ESM will come with strict conditions and that private creditors will likely bear some of the burden. Private-sector involvement "will be the rule" for the stability mechanism, said Klaus Regling, head of the European Financial Stability Facility, the ESM's precursor.

The EFSF got a long-awaited boost in its lending capacity, to €440 billion ($630 billion) from about €250 billion. To ensure that the fund can borrow with a triple-A credit rating, the ministers agreed to raise their guarantees on the EFSF's borrowing to €780 billion from €440 billion.

Some of the EFSF's funds will likely be chewed up by Greece. Ministers have acknowledged the country will need more money next year, beyond the €110 billion pledged.

They are still wrestling with how to do it—particularly with the knotty question of how to share the burden with private creditors. Germany had wanted private creditors to exchange their maturing bonds for new Greek debt, reducing the amount of cash it and other euro-zone countries need to come up with.

But that might have led Greece to be called into "selective default" by credit-rating agencies, something the ministers have now agreed shouldn't happen.

"There will be no compulsion whatsoever," Mr. Juncker said Monday.

Euro-zone ministers said Monday morning that they want to induce creditors to reinvest voluntarily, but it is unclear how many will risk lending anew to a heavily indebted country in deep political turmoil.