Greek Finance Minister Heads to Brussels; Loan Talks Stall

The Wall Street Journal

By NEKTARIA STAMOULI, ALKMAN GRANITSAS and STELIOS BOURAS

… slash minimum wages in the private sector by 22%...

… abolish permanent jobs in state enterprises and cut 150,000 jobs in the public sector by 2015…

… parties clashed over whether to enact cuts in primary or supplemental pension benefits…

ATHENS—Greece's finance minister headed for Brussels early Thursday to try to clinch a new aid deal with European partners, after all-night talks in Athens stumbled over demands by international creditors for deep cuts in pension benefits.

Speaking after a five-hour meeting with a delegation of European and International Monetary Fund officials, a visibly tired Evangelos Venizelos signaled that he expected euro-zone finance ministers to bridge differences over the loan program at a meeting scheduled for later in the day.

"I leave in a short while for Brussels with the hope that the euro group meeting will convene and that it will take a positive decision for the new program," he said. "There remain issues that need to be clarified by the time of the euro group meeting."

The latest setback in the talks follows weeks of difficult negotiations between Greece and the European Commission, the IMF and the European Central Bank—known as the troika—that were marked by several delays and missed deadlines.

In yet another delay late Wednesday, leaders from the three political parties that make up Greece's coalition government agreed to most of the creditors' demands, but failed to resolve a dispute over pension cuts the country must take to secure a new €130 billion ($172.39 billion) aid package.

The dispute has led to a €600 million shortfall in the country's budget targets. In fraught negotiations that continued into the early hours of the morning, Greece offered to make up roughly half of that through deeper cuts in defense spending, and was given 15 days to detail how it would cover the other half.

"The talks have been completed. Most issues have been resolved, one issue remains to be clarified," said a government official. "We are going to the euro group to close the agreement."

Under the draft agreement with the troika, seen by The Wall Street Journal, Greece will slash minimum wages in the private sector by 22%, abolish permanent jobs in state enterprises and cut 150,000 jobs in the public sector by 2015, among other measures.

But in the meeting of the party bosses, the three leaders of the Socialist, New Democracy and Laos parties clashed over whether to enact cuts in primary or supplemental pension benefits paid to retirees.

Faced with a tight deadline on March 20, when a €14.4-billion bond comes due, Greece and its international creditors are fast running out of time to wrap up the deal, which also includes a €100 billion debt write-down plan with private-sector creditors. Approval of the bailout package will pave the way for a bond-swap offer to the private sector, which Greece is hoping to complete by early March.

Pressure on Greece has been piling up from its euro-zone partners to accept the new round of painful austerity in exchange for the aid promised to the country last October.

The international lenders have asked Greece to come up with €3.2 billion in spending cuts for 2012 alone. They also sought the mass layoff of some 15,000 civil servants in Greece's bloated public sector in 2012, as well as steep cuts in supplemental pensions paid to retirees.

According to the draft agreement, cuts in pensions will result in savings of €600 million.

Political leaders had already agreed earlier on some of the basic points of the international lenders' demands. Among them are spending cuts equal to 1.5% of gross domestic product in 2012, steps to recapitalize Greece's banks, and measures to boost the country's flagging competitiveness.

But conservative leader Antonis Samaras said Tuesday that he opposes the pension cuts, which would push the country further into recession.

The agreed draft plan projects Greece's economy will contract 4% to 5% in 2012 before returning to growth in the first half of 2013.

Social pushback in Greece has stepped up the domestic political risks for party leaders as they balance reform demands with the need to retain popular support ahead of new elections later this year. Protesters in central Athens claim the new programs will impoverish households and sink the country deeper into recession.

The new cuts also are likely to face resistance among lawmakers, many of whom have already balked at voting for new cutbacks. If there is an agreement, the Greek parliament is expected to convene in an emergency session Sunday to approve the program. However, the exact timing of the vote—and whether parliament will vote on all or just some of the measures—hasn't been decided.

Two Socialist lawmakers have signaled they would vote against the reforms—although it is unlikely a revolt by deputies will imperil the government's supermajority in parliament. The three parties that make up the coalition control 252 seats in the 300-member parliament.

As a condition for further aid, Greece's official lenders have demanded cross-party support for the reform and austerity program, to ensure there is no backsliding after a new government takes office later this spring.

Mr. Samaras, who is widely expected to win the next elections according to recent polls, has balked at the idea of establishing an escrow account proposed by France and Germany to guarantee Greek debt repayments.

"The escrow account is an indirect oversight of Greece by Germany," Mr. Samaras said. "I have a problem with that."

The proposal for such an account to handle Greek bailout funds as well as the ECB's involvement in the Greek debt restructuring were expected to be discussed at Thursday's meeting, a senior euro-zone official said.

Concerns that the debt restructuring doesn't go far enough in reducing Greece's debt burden may ease after the ECB signaled it is willing to make key concessions over its holdings of Greek government bonds, according to people briefed on Greece's debt-restructuring negotiations.

The ECB would exchange Greek government bonds it purchased in the secondary market last year for bonds of the European Financial Stability Facility, the EU bailout fund, at a price below face value, provided the debt-restructuring talks have a successful outcome, the officials said.

That could contribute to a reduction of the country's debt burden and smooth the path toward a new bailout.

The ECB will make its final decision to take part in the deal after other key elements of the debt restructuring fall into place, perhaps not before the weekend, people familiar with the situation said Wednesday.

—Costas Paris and Geoffrey Smith in London, Matina Stevis and Stephen Fidler in Brussels and Bernd Radowitz in Berlin contributed to this article.

Write to Alkman Granitsas at alkman.granitsas@dowjones.com