Euro Zone Finance Ministers to Wrestle With Greek Debt

BRUSSELS — Finance ministers from euro area countries were scheduled to gather here on Monday evening to confront a Greek debt that still threatened to torpedo the European monetary union after three years of unbroken crisis.

But the ministers still were unlikely to sign off on a long-delayed tranche of aid for Greece ahead of a final report by the so-called troika of lenders — the European Commission, International Monetary Fund and European Central Bank — on reforms Athens agreed to make as a condition of two bailout packages totaling €240 billion, or $305 billion.

Another factor hampering the disbursement the next slice of bailout aid fro Greece is likely to be ongoing discussions over how to put the country back on track over the next decade as the economy continues to falter and violent protests flare over government-imposed austerity measures.

Reaching agreement on measures intended to make the Greek debt sustainable is a precondition for releasing the €31.5 billion tranche of aid that Greece needs to stave off bankruptcy.

Failure to disburse that money could result in the country’s disorderly exit from the euro and renewed threats to the viability of the currency.

The fragile coalition government led by Prime Minister Antonis Samaras had been expected to win parliamentary approval late Sunday for its 2013 budget, which prescribes spending cuts and tax increases worth €9.4 billion, as demanded by the troika.

Last Wednesday, the government narrowly won approval of a four-year program that attains €17 billion in budget savings through sharply reducing pensions and public-sector salaries and imposing a raft of structural reforms including an overhaul of labor laws and the opening of restricted professions to more competition.

The precarious finances of Greece will be in the spotlight again later this week when a €5 billion debt payment falls due, but the Greek public debt agency said last week that it should be able to make a special issue of treasury bills on Tuesday to cover the redemptions.

“It’s a no-brainer if I say there will be no accidental defaults,” a senior euro zone official said Friday, referring to the €5 billion payment due at the end of this week. The official spoke on condition of anonymity because of the sensitivity of the financing for markets and governments.

The amount of progress that euro zone ministers make Monday may largely depend on the completeness of the troika report, which is expected to outline Greece’s additional funding needs but probably will not be in its final form.

Greece has made “enormous efforts” to implement the austerity and reform measures needed to get its next tranche of financial assistance, but “there is a very, very high degree of plausibility that there will need to be a second round of discussions in order to finalize everything,” the euro zone official said.

Other obstacles to rapid progress on Greece include disagreement among members of the troika on how soon the huge stock of Greek debt can be brought down and put on a sustainable path.

Many analysts agree that at some point, Greece’s official lenders will have to take politically unpalatable losses, or haircuts, on their holdings of Greek debt in order to keep the country in the euro area, even if a range of other measures is taken to reduce the size of the state deficit and reform the economy.

“The euro area is at a very critical juncture” over Greece, Zsolt Darvas, a research fellow at Bruegel, a research organization, wrote in a report issued Friday. “Policy makers have to recognize the impossibility of the trilemma of no additional funding, no restructuring of official loans, and no default and exit from the euro.”

Last week, Barclays estimated that giving Greece two more years, to 2016, to reach its deficit target of 3 percent of gross domestic product, compared with a deficit of 9.1 percent of G.D.P. at the end of 2011, could cost as much as €40 billion.

Barclays said half of the extra €40 billion would be the cost of running bigger deficits for longer, while the further delay in Greece regaining access to the markets would account for about €10 billion.

It said the remaining €10 billion would come from reduced earnings from the privatization of government assets. Income from privatizations has been overestimated, the bank said, and is likely to be revised down.

“In the long run, we believe that debt sustainability will require further official sector involvement in the form of haircuts or transfers in order to avoid an excessively long period of adjustment and austerity, which would trigger social unrest, and possibly political instability and a disorderly and costly exit from the euro area,” Fabrice Montagne, a senior European economist at Barclays, wrote in a briefing note.

On Tuesday, finance ministers from the 10 European Union member states outside the euro area are to join the meeting in Brussels and attempt to overcome sharp differences over how to operate a so-called banking union.

Agreed to by the Union’s leaders in June, the new system would eventually put all 6,000 lenders in the euro zone under the supervision of the European Central Bank, instead of leaving that role exclusively to national regulators.

Some of the most difficult discussions concern Britain, which has recoiled at the prospect of the 17 euro zone countries voting as a single bloc on future banking regulations that could diminish the pre-eminence of the City of London in European finance.

The new banking rules also are a sensitive matter for central and eastern European countries that remain outside the euro area and that could be more exposed to the threat of a run on banks that do not fall under the authority of a new pan-European regulator nor are backstopped by the European Stability Mechanism bailout fund.

Niki Kitsantonis contributed reporting from Athens.

Article source: http://www.nytimes.com/2012/11/12/business/global/euro-zone-finance-ministers-to-wrestle-with-greek-debt.html?partner=rss&emc=rss