Greece will need third aid deal, German Finance Minister admits

By Gernot Heller

AHRENSBURG, Germany | Tue Aug 20, 2013 8:20am EDT

(Reuters) - Germany's finance minister admitted for the first time on Tuesday that Greece would need a third aid package, as a source in Athens said the sums involved in any new deal would be far smaller than previous rescues.

"There will have to be another program in Greece," Wolfgang Schaeuble told a campaign audience in northern Germany, in comments that raised prospect of a step that could be deeply unpopular domestically just five weeks before national elections.

In Athens, a Greek finance ministry official told Reuters a new bailout would focus on plugging an expected funding shortfall over 2014-2016.

"Greece and its lenders are examining several ways to plug any funding gap that Greece will face over the next few years," the official said on condition of anonymity.

The measures included using leftover funds from a bank bailout program and previously discussed debt support measures, the official said.

In Frankfurt, the European Central Bank said Executive Board member Joerg Asmussen would visit Greece on Wednesday to discuss progress on reforms needed to ensure more bailout money.

Schaeuble's comments go beyond any utterances from Chancellor Angela Merkel, tipped to win a third term in the September 22 election, who has taken a more cautious line on Greece to avoid angering voters who fear they will have to foot the bill for Athens.

Schaeuble has said in the past that international lenders may have to consider a new aid program for Greece after the existing one runs out at the end of 2014, but he has never described this as inevitable, as he appeared to do on Tuesday.

He added that there would be no further debt haircut for Athens.

PROGRESS?

Greece got an aid tranche of 5.8 billion euros ($7.75 billion) from its international lenders - the euro area, its national central banks and the International Monetary Fund - in July and stands to receive another 1 billion euros in October, subject to implementation of further reforms.

The international lenders, known as the troika, will return in Athens in the autumn to find out whether the government needs to find further savings to meet its 2015-2016 budget targets.

As a prelude to that, the ECB's Asmussen will this week meet Central Bank Governor George Provopoulos, Finance Minister Yannis Stournaras and George Zanias, chairman of Greece's biggest lender, National Bank (NBGr.AT), Greek sources told Reuters.

Progress on reform in the recession-stricken country has been patchy and there have been several reports that Greece may need another aid package or more debt relief to get back to a more sustainable financial position.

Earlier this month, the German government, one of Greece's biggest creditors, dismissed a report by Der Spiegel magazine, which quoted a document that said Europe "will certainly agree a new aid program for Greece" and that the existing aid package carried "extremely high" risks.

As Europe's biggest economy, Germany takes the biggest share of bailouts which are unpopular with taxpayers.

Merkel, whose soaring popularity is due in part to the hard line she has taken during the euro zone crisis and her focus on austerity, again tried to quash speculation about Greece in an interview with the Ruhr Nachrichten newspaper on Tuesday.

"No, I don't expect a new haircut for Greece. We are moving ahead step for step. There is no question that a lot has to change in Greece. But we also see clear progress and recognize this," she was quoted as saying.

"In the euro zone, we always said that we would evaluate the Greek situation again at the end of 2014 or in early 2015. It makes sense to stick to this timeline."

France, a crucial partner for Germany within the EU, has stressed that Greece is heading in the right direction.

"It seems to me that this program is on track," French Finance Minister Pierre Moscovici told Inter radio. "I don't see an urgent need for a new aid plan for Greece."

Tax revenues continue to lag targets, however, and the Greek economy is deep into a depression. It shrank at an annual rate of 4.6 percent in the second quarter. This was, however, a little better than forecast, leading some economists to predict the contraction may decelerate in the fourth quarter.

Polls show that Merkel's conservatives are likely to win the biggest number of seats in parliament in the German election.

It is, however, unclear whether she will be able to continue her coalition with the Free Democrats (FDP), who are more skeptical towards Europe, or if she will have to seek another alliance, the most likely of which is a "grand coalition" with the pro-Europe Social Democrats (SPD).

(Additional reporting by Eva Taylor in Frankfurt, George Georgiopoulos and Lefteris Papadimas in Athens, Nicholas Vinocur in Paris; Writing by Madeline Chambers; Editing by John Stonestreet)