Europe, Central Bank Spar Over Athens Aid

Discord Over Who Should Shoulder Burden of Giving Greece More Time to Repay Loans Comes Ahead of Crucial Deadline

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By BRIAN BLACKSTONE and GABRIELE STEINHAUSER

Europe's governments and the European Central Bank are at odds about who should shoulder the financial burden of giving Greece more time to repay its loans and remain part of the euro zone.

The search for a solution for Greece, whether by forgiving some of the money it owes or giving it yet more bailout loans, has come back to haunt the currency union ahead of the ECB's monthly policy meeting on Thursday.

Greece faces a key Treasury-bill repayment in less than two weeks, and the money isn't there unless governments provide additional aid or the ECB agrees to lend Greek banks the money to roll over the debt.

It is a particularly sensitive issue for the ECB, which is trying to create a credible financial backstop to hold the euro together while governments overhaul their economies and finances.

But with each step the ECB takes to help Greece and others, it inches ever closer to rules that prevent it from printing money to help governments out of their debt problems. The bank is already facing accusations in Germany that it is straying from its primary mandate to keep inflation low.

Governments and the ECB are under pressure because another player in Greece's bailout deals, the International Monetary Fund, says it will continue supporting Athens only if there is a realistic chance the aid can be repaid.

ECB officials are willing to sell the central bank's Greek bondholdings for the price it bought them, forgoing any profit, people familiar with the matter said. But this step would meet only a fraction of Greece's financing needs. The bulk of the work must be done by European governments, ECB officials say.

Last week, Greece said its debt next year will equal nearly 190% of its gross domestic product and debt inspectors from the European Commission, IMF and ECB say they believe that debt will still be around 140% by 2020 without changes to the bailout program. That is far above the 120% target set in February, when Greece's latest bailout deal was sealed.

A worse-than-expected recession has put Greece's budget targets out of reach, and most euro-zone governments now favor giving Athens two extra years to bring its deficit under control—a move the troika expects to cost some €30 billion ($38.5 billion). Much of this would have to come from its official creditors as private bondholders own just €60 billion in Greek debt after taking a large write-down earlier in the year.

Greece's need for extra aid gives the euro zone several stark options. For many governments, especially in rich countries including Germany and Finland, again asking their parliaments for new loans for Athens is politically difficult. But even lending Greece the missing funds wouldn't solve the issue, since new loans would further drive up Greece's debt load.

The IMF in particular has been pushing the euro zone to reduce that debt load by writing off some of the money the bloc has already lent Greece. But if governments were to take a loss on some of the Greek rescue loans they would walk back on the central promise they have made to their voters during the crisis: that the bailouts would be paid back. Several European officials have stressed that such debt forgiveness isn't seen as a feasible option at the moment.

IMF Managing Director Christine Lagarde homed in on some €40 billion in Greek bonds the ECB bought in the early days of the debt crisis in 2010, rather than demanding governments take a loss, in a conference call last week with euro-zone finance ministers, said a European Union official.

ECB officials think they could legally sell bonds back to Greece without profit or losses. The bank bought the bonds in the spring and summer of 2010 at a discount of about 20%, meaning the transaction could yield as much as €8 billion in debt relief for Athens.

However, this plan would require governments to lend Greece more money to buy back its bonds from the ECB, something they have balked at doing before.

Instead, some euro-zone governments want the ECB to ease repayment terms of the Greek bonds, passing on the discount it got by giving Athens more time to repay them or lowering interest rates, said European officials.

But at October's policy meeting, ECB President Mario Draghi ruled out any restructuring of the ECB's Greek bonds, saying it "would qualify as monetary financing."

Some governments also want to get Greece to issue more short-term debt to cover some of its funding shortfall—a move that would also require ECB consent. Greece has to repay some €5 billion in treasury bills on Nov. 16, most of which are owned by Greek banks but have been deposited with the Greek central bank as collateral in return for loans.

Although these risks reside with Greece's central bank, and ultimately the Greek government, the full ECB council must approve use of that lending facility, called Emergency Liquidity Assistance.

The ECB would probably allow the facility to be used to help roll over the maturing T-bills, said people familiar with the matter, provided there is a political agreement to disburse Greece's long-delayed €31.5 billion bailout installment.

The Greek issue will likely overshadow the ECB's monthly interest-rate deliberations Thursday. The central bank's main policy rate is 0.75%, a record low, leaving room for further cuts. But ECB officials are concerned that fragmented financial markets across the 17-member euro zone would undermine the effectiveness of any new stimulus.

"The view at the ECB appears to be that there's only so much monetary policy can do" to jump-start economic growth, said Ken Wattret, economist at BNP Paribas, BNP.FR +1.32% who expects the central bank to stand pat on rates.

Write to Brian Blackstone at brian.blackstone@dowjones.com and Gabriele Steinhauser at gabriele.steinhauser@wsj.com