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| Christine Lagarde, Managing Director, International Monetary Fund (Photo credit: Wikipedia) |
In the latest compromise in three years of crisis fighting, creditors led by Germany opted late yesterday 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 the countries that remain in the single-currency bloc.
Greece has made “far-reaching decisions that go in the right direction,” German Finance Minister Wolfgang Schaeuble told reporters in Brussels today. He said Greece’s aid program can be re-engineered to plug a financing gap of as much as 32.6 billion euros ($41 billion) without costing creditors a cent. Prospects of a funding deal at a hastily scheduled Nov. 20 meeting were clouded by objections from the International Monetary Fund, which took issue with the ministers’ decision to postpone the goal of getting Greece’s debt down to a “sustainable” level of 120 percent of gross domestic product by two years to 2022. Greek bonds, the euro and European stocks declined on concern that Europe has limited options for keeping the Greek program on track three years after the start of the debt crisis, which continues to test whether the 17-nation euro will survive intact.
‘Different Views’
Managing Director Christine Lagarde left open whether the IMF, provider of about a third of 148.6 billion euros in loans funnelled to Greece since 2010, will maintain its lending after the euro-area ministers consented to higher Greek debt for a longer period and ruled out a write-off of official debt. “Debt sustainability of Greece has to be measured in 2020,” said Lagarde, who was French finance minister when the crisis started. “We clearly have different views. What matters at the end of the day is the sustainability of the Greek debt.” The extra financing need was triggered by a decision to give Greece two more years, until 2016, to cut the deficit to 2 percent of GDP. Refusal by the IMF to pitch in would increase the cost for European governments, led by Germany, the dominant lender to Greece and three other countries -- Ireland, Portugal and Spain -- that have fallen back on international aid.
Extra Time
For now, Schaeuble said the terms of the Greek package can be rejiggered by cutting the rates on bailout loans or giving Greece extra time to pay them back, without requiring creditors to put up more loans or write off parts of Greece’s official debt. “Our assumption is that the program is working so that in the end, it’s a matter of guarantees and not benefits for Greece,” Schaeuble said. Write-offs are a legal and political taboo for German Chancellor Angela Merkel, running for re-election in late 2013 with the argument that her anti-crisis prescriptions are working and unwilling to call on the German parliament to authorize more money. Greece’s loan rates have been cut and maturities extended twice before. Schaeuble characterized the resulting cost to creditors as a reduction in profit. He said other, as yet undisclosed, steps can be taken to make the Greek fiscal math add up.
‘Definite Decision’
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 throwing good money after bad. Luxembourg Prime Minister Jean-Claude Juncker, who chaired yesterday’s meeting, predicted a “definite decision” next week on releasing the next aid payment, 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. The likely outcome is “a typical euro-zone fudge,” said Carsten Brzeski, an economist at ING Group NV in Brussels. “Needless to say, the final decision on the next Greek tranche, a new financing gap and debt sustainability will not be the end of the matter.” 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. ... Continue to read.
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