Europe Gives Greece 2 More Years to Reach Deficit Targets

By James G. Neuger and Stephanie Bodoni - Nov 13, 2012 5:09 AM GMT+0200

Bloomberg

Euro-area finance ministers gave Greece two extra years to wrestle down its budget deficit, pledging to plug the resulting financing gaps in order to keep the country in the single currency and prevent a renewed flareup of the debt crisis.

Finance ministers granted Greece until 2016 to cut the deficit to 2 percent of gross domestic product. They put off until Nov. 20 a decision on how to cover additional Greek needs of as much as 32.6 billion euros ($41 billion) and left unclear whether the International Monetary Fund will continue to contribute.

In the latest compromise in three years of crisis fighting, creditors led by Germany opted to keep money flowing to Greece instead of risking a default that could lead to the nation’s exit from the euro and stir more turmoil for countries left in it.

“Greece has done a big part of what it was supposed to do, adopted an ambitious reform program and a budget for 2013 that’s impressive,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels late yesterday after chairing the ministers’ meeting. He said “a certain number of avenues” except the writedown of official loans are being looked at for filling the funding gap.

Markets React

The MSCI Asia Pacific Index dropped 0.7 percent as of 11:53 a.m. in Tokyo. Futures on the Standard & Poor’s 500 Index traded 0.4 percent lower. The euro reached a two-month low against the U.S. dollar, and oil futures slipped as much as 0.6 percent.

Left unanswered was how the creditor governments will keep Greece afloat without putting up more money themselves, a question that may dog German Chancellor Angela Merkel during her campaign for reelection in late 2013. The role of the IMF, provider of about a third of 148.6 billion euros in loans funnelled to Greece since 2010, also went unsettled.

IMF Managing Director Christine Lagarde took issue with a decision by the euro chiefs to postpone the goal of getting Greece’s debt down to a “sustainable” level of 120 percent of GDP by two years, until 2022.

“Debt sustainability of Greece has to be measured in 2020,” Lagarde said. “We clearly have different views. What matters at the end of the day is the sustainability of the Greek debt.”

Contagion Risks

The country’s recession-hit and debt-encumbered economy returned to the spotlight just as concerns mount over Spain and Cyprus and at a time when crisis management is clouded by forecasts that the 17-nation currency bloc’s economy will virtually grind to a halt next year.

Juncker called the Nov. 20 special meeting to make a “definite decision” on releasing the next aid tranche, worth 31.5 billion euros. He said the ministers might have to meet again, possibly by teleconference, by the end of November to formally sign off on the updated rescue package.

Economically and politically, the European commitment marked a triumph for Greek Prime Minister Antonis Samaras, who in power has whipped through the same budget-cutting policies that he was against while in opposition in order to keep Greece in the euro.

“It’s a done deal,” Greek Finance Minister Yannis Stournaras said. “It’s very important.”

‘Pressure Groups’

In a report presented to the ministers, praise for Greece’s savings measures and economic shakeup blended with concern that “vested interests” and “powerful pressure groups” will frustrate the reforms. Demonstrations and strikes have blunted past revamp efforts, and 15,000 people protested outside parliament in Athens two nights ago against the passage of an austerity budget for 2013.

“The key risks concern the overall policy implementation, given that the coalition supporting the government appears fragile and some components of the program face political resistance, despite the determination of the government,” said the report by the “troika” made up of the European Commission, European Central Bank and IMF.

Options floated for plugging the financing hole include cutting the interest rates and extending the maturities on Greece’s aid loans, accelerating rescue bailout payments and engineering a buyback of Greek debt, most of which is held by public creditors. German, Dutch and Finnish officials have said no to outright debt relief.

Debt Sustainability

“For the moment Greek debt is not sustainable and therefore we need significant reduction of the debt burden, but that does not include of haircuts to principal of public loans,” European Union Economic and Monetary Commissioner Olli Rehn said. “There are other ways and expect it will be a combination of various options.”

In the meantime, Greece will escape a default on Nov. 16 when 5 billion euros in treasury bills come due. Greek banks will be able to roll over their bill holdings, saving the country from the “financing cliff,” Rehn said.

The search for a solution will run in parallel with parliamentary debates in countries such as Germany, Finland and the Netherlands, three countries that have handed control over bailout policy to lawmakers concerned about wasting taxpayers’ money.

On his way into the meeting, Finance Minister Wolfgang Schaeuble of Germany, the biggest contributor to the European bailouts, said the priority is on “thoroughness” and added that his country’s stance will be dictated by its parliament.

“Everyone needs to be very pragmatic,” said Finance Minister Pierre Moscovici of France, which under new President Francois Hollande has emerged as an advocate of the fiscally strapped south. “We have an agreement on principles. Now we have to apply them.”

Schaeuble and Moscovici plan a joint briefing at 9:30 a.m. today to project a common stance on fighting the crisis.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Stephanie Bodoni in Brussels at sbodoni@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net