No deal for Greece

Jun 20th 2011, 1:

The Economist

THEY bargained through the night, but in the end they failed to reach an agreement to release the next desperately-needed tranche of money for Greece. Expect a new round of panic in the bond markets.

After seven gruelling hours in Luxembourg, which included a video conference with colleagues from G7 countries, the finance ministers of the 17 countries of the euro zone  decided to delay until July the disbursement of €12 billion ($17 billion) in loans from the European Union and the IMF.

By then, they said, two issues would have become clearer. Firstly, the finance ministers say they want to know how far Greece’s private creditors are willing to help “voluntarily” by rolling over Greek debt when current bonds mature. This has become vital for German domestic opinion to sweeten the bitterness of having to support a second bail-out for Greece.

Secondly, the euro zone wants to know whether the reshuffled government of George Papandreou, the embattled Greek prime minister, will secure a vote of confidence in the Greek parliament, which is expected to come on Tuesday. Greek MPs are also due to approve, by the end of June, the next round of austerity measures and structural reforms—including a wholesale privatisation of state companies and lands.

The emergency meeting, which followed an inconclusive round of talks in Brussels last week, saw the first appearance of Greece's new finance minister, Evangelos Venizelos (pictured). He is a veteran political bruiser (with the build to match) but a neophyte in economic policy. He declared the meeting would be "a great opportunity for me to repeat the strong commitment of the Greek government and the strong will of the Greek people for the implementation of the programme." But it was plain that the ministers would not take just his word for it; they want a legally binding vote in parliament, and consensus from the opposition too.

Just a few days earlier, in an attempt to calm markets fearing a Greek default this summer, Olli Rehn, the European financial-affairs commissioner, had predicted there would be a deal to continue financing Greece at least until September. Some calm had been restored by signals that the IMF would not block the tranche if it received some kind of guarantee that the EU would cover Greece’s funding gap next year, given that it will not be able to return to the markets in 2012, as expected.

But in the end the ministers decided they could not issue a blank cheque. Jean-Claude Juncker, the prime minister of Luxembourg, who also presides over the euro-area finance ministers, declared: “I cannot imagine for one second that we would commit to finance Greece without knowing that the Greek parliament has given its vote of confidence to the government, and that it has taken on Greece’s commitments [to the EU/IMF].”

So why spend seven hours behind closed doors, only to decide to wait and see? Because, Mr Juncker said, figuring out how to squeeze out some funding from private creditors, without it being deemed a default, “is very complicated”. As a result of the discussion, he said, the euro group had “cleared the way for a solution”.

The only obvious progress tonight was that Germany has formally abandoned its demand that existing bonds be swapped for new ones with a seven-year maturity. Instead, the ministers agreed that private creditors would be asked only for “informal and voluntary roll-overs of existing Greek debt at maturity…while avoiding a selective default for Greece.” The only stipulation is that the resulting contribution be “substantial”—a weaker formulation than the original German wish for a contribution that is “'substantial, quantifiable, reliable and voluntary”.

One must assume that the sums that can be raised for the rescue package will now be more modest, which raises the question of whether the prevarication is really worth the turmoil it is causing.

The ministers will meet again later today to talk about other aspects of how to govern the euro zone, for instance the details of the treaty change to create a permanent bail-out fund. This will have little impact on the Greek crisis—unless, that is, they fall out on issues that were supposed to have been settled months ago.