EU Ministers Press Greece, Creditors

The Wall Street Journal

By COSTAS PARIS, MATINA STEVIS and RIVA FROYMOVICH

… a crucial chunk of Greece's first bailout was withheld for several weeks, partly because Greece's then-opposition leader, Antonis Samaras, refused to commit to the austerity policies…

… EU ministers indicated they had lost faith in Greece's ability or will to implement the overhauls…

BRUSSELS—European Union finance ministers on Tuesday further pressured Greece and its private-sector creditors to ensure a proposed deal to restructure Greece's private-sector debt will be enough to put the country back on a firm fiscal footing.

The International Monetary Fund and wealthier euro-zone countries want a low average interest rate on new bonds to be issued as part of the restructuring, in order to ensure Athens can pay its debts and avoid extra financing.

But after 24 hours of talks, EU finance ministers urged Greece to implement tough austerity and structural overhauls and provide more written assurances to its partners that it would meet its promises before a second bailout can be implemented.

"We need clear commitments from all the political forces in Greece so that there is clear backing for the new program. That is a necessary precondition for a new Greek program to succeed," said Olli Rehn, the European commissioner in charge of economic affairs.

German Finance Minister Wolfgang Schäuble said Greece must commit to carrying out the pledges for overhauls the country has made, no matter who wins elections expected to take place in April. Lucas Papademos was appointed to lead an interim technocrat government late last year to secure new bailout funding for the country.

The news came as John Chambers, head of Standard & Poor's sovereign-ratings committee, said Greece is "in all likelihood" headed for a default in the first half of 2012. Speaking at Bloomberg's sovereign debt conference in New York on Tuesday, Mr. Chambers said Greece will suffer a default under the ratings firm's definition, whether it happens in the form of a distressed exchange of debt or missed payment on certain bonds.

In late 2011, a crucial chunk of Greece's first bailout was withheld for several weeks, partly because Greece's then-opposition leader, Antonis Samaras, refused to commit to the austerity policies. Eventually, Mr. Samaras did sign the letter and Greece received the money.

Mr. Samaras's New Democracy party had no official comment, but party officials privately say they support the new loan deal and will, if pressed, again affirm their support in a written letter.

In Brussels, several EU ministers indicated they had lost faith in Greece's ability or will to implement the overhauls.

Austrian Finance Minister Maria Fekter said she is "not pleased" with progress. "We're sending a very direct message to Greece that the community expects more, also in terms of structural reform."

Swedish Finance Minister Anders Borg said Greece had "not delivered" on overhauls.

Greek Finance Minister Evangelos Venizelos acknowledged there have been slippages in the implementation of austerity measures.

Greece is expected to take more austerity as a condition for its second program. Mr. Venizelos said the matter would be discussed with political leaders this week. "There will be signed commitments by all. It would be good if this could be done this week," he told a news conference.

The EU finance ministers on Tuesday also discussed European Commission proposals for tighter economic governance, preparations for a February meeting of finance officials from the Group of 20 industrialized and developing nations and the implementation of new fiscal controls.

Finance ministers from the 17 countries that share the euro on Monday agreed on the text of a treaty that will allow the setting up of the European Stability Mechanism, the region's permanent bailout fund, in July.

Italian Prime Minister Mario Monti on Tuesday reaffirmed his call for expanding the €500 billion ($650.8 billion) fund, and said resistance from some European leaders, particularly in Germany, to increasing the size may ease as countries agree on stricter fiscal discipline.

EU leaders are expected to discuss the so-called fiscal compact at a summit next Monday. The compact seeks to impose tougher sanctions for countries that fail to meet budget targets.

But Germany and other EU countries raised concerns on Tuesday about a separate European Commission proposal that seeks to give Brussels new powers over the finances of member states. The proposal could see euro-zone states having to report budget plans to the EU executive before approval by their governments. If adopted, it would also empower the commission to recommend a government seek financial assistance, with member states then voting on that.

Some countries said the budget rules should apply only to those running large deficits. Meanwhile, German officials raised concerns about publicly recommending a member state take financial assistance, arguing such a move could roil markets.

It was Greece's debt restructuring that was at the forefront. The restructuring is planned to take the form of a bond exchange in which creditors holding some €200 billion in debt swap their securities for new instruments with half the face value. The key sticking point is how much interest the new bonds should pay.

The restructuring is part and parcel of the second bailout program for Greece, amounting to €130 billion. Without this loan, Greece will default on a €14.4 billion bond maturing on March 20.

The country's private-sector creditors, the majority of which are represented by the Institute of International Finance, said they won't accept an average interest rate of less than 4%.

The IMF voiced concerns Monday that the deal being discussed by Greece and the creditors would leave the country with a higher-than-expected debt burden in the years ahead. Jean-Claude Juncker, head of the Euro Group of finance ministers from the currency area, said Monday that interest rates on the new bonds should be less than 3.5% to lower Greece's debt to 120% of gross domestic product by 2020.

The IMF and some euro-zone countries are reluctant to permit high interest rates, in part because they would have to lend Greece the money to pay them.

"Greece only nominally has the control of the process.…The negotiation is conducted by Greece with the negotiating team," Mr. Venizelos said. He had earlier said that, "The Euro Group decided to give us the green light, to us and the troika and the negotiating team in which the troika, the [European Financial Stability Facility] and some governments like Germany and France participate in to complete in the next few days the talks with the private sector."

The so-called troika is comprised of the IMF, the European Commission and the European Central Bank.

The Greek Finance Ministry said it expects to present a formal offer to creditors by Feb. 13. But European officials had hoped a deal with creditors could be reached by the end of this month.

"It is obvious that the Greek program is off track," said Mr. Juncker. Euro-zone governments asked the Greek government to reach a common understanding on the terms and conditions of the restructuring offer in the next few days, he said.

Mr. Rehn said he expected the talks to last one or two more weeks while Mr. Schäuble said a new report from inspectors representing Greece's troika of lenders should be ready in early February.

At the meeting Tuesday, EU finance ministers also cleared the last hurdles and agreed on a proposal to standardize most over-the-counter derivatives contracts. The compromise, which comes after several months of arguing over technical details, opens the way for talks with the European Parliament before agreement on a final text.

— Frances Robinson, Bernd Radowitz, Giada Zampano, Flemming Emil Hansen, Laurence Norman, Ainsley Thomson and Matthew Dalton contributed to this article.

Write to Costas Paris at costas.paris@dowjones.com and Riva Froymovich at riva.froymovich@dowjones.com