Brussels, 27/11/2012 (Agence Europe) - After the third Eurogroup meeting in a fortnight that lasted for 12 solid hours, the eurozone and the IMF managed in the early hours of Tuesday 27 November to reach agreement in principle on how to reduce Greece's debt to a viable trajectory, agreement which was the last remaining obstacle for disbursement of the next batch of aid, €43.7 billion. It has now finally been agreed that Greece's debt must be cut to 124% of GDP in 2020 (in the spring of this year, the second Greek bailout stipulated 120% of GDP for 2020). It took plenty of haggling to reach a deal, with European solidarity put to the test.
The date for the final decision on payment of the next batch of Greek aid has been set for 13 December, at the next European Summit. In mid-December, the European Financial Stability Fund (EFSF) will give Greece €34.4 billion in loans, €10.6 billion of which for the budget and €23.8 billion to bail out Greek banks. Between now and then, eurozone nations requiring the go-ahead from their parliaments for release of the aid will arrange the necessary votes. The German Bundestag may vote this Friday, said German finance minister Wolfgang Schäuble. Eurogroup is planning to provide a further €9.3 billion in three batches in the first quarter of 2013, as long as Greece implements the reforms laid down in the loan agreement (the Memorandum of Understanding), particularly tax reforms in January.
Timing. In order to continue to support Greece, the IMF says it is crucial that the country's debt be reduced to a sustainable trajectory. It is expected to hit 190% of GDP in 2014. The trajectory decided upon is 175% in 2016, 124% in 2020 and 110% in 2022. The IMF initially wanted to stick to the agreement reached in the spring, but gave way in the end, although requiring that the debt/GDP ratio is reduced to “substantially” below the 110% point in 2022, explained IMF director general Christine Lagarde. She added that the IMF wanted to ensure that the eurozone would take the measures needed to get Greece back on track for a viable debt and that has indeed been done. She rejected fears of the IMF withdrawing from the Greek aid programme, saying: “We have no intention to pull out.”
Eurozone member states will have to regularly examine the Greek debt situation between now and 2016, by which time the country should have reached a primary budget surplus of 4.5% (two years earlier than initially planned). The eurozone has not ruled out the need to take additional measures if there are problems getting the debt on track by then, explained Euro Commissioner Olli Rehn. “We will do what has to be done,” explained French economy minister Pierre Moscovici, expecting the measures laid down by Greece's lenders to be successful, expectations backed by Wolfgang Schäuble.
No debt write-down for public bond holders. As a result of the worsening economic and political climate in Greece, there is a financial cost attached to the easing of the public finance correction measures for the country (primary surplus and debt trajectory), but despite pressure from the IMF, the eurozone is still refusing to countenance any “official sector participation” (OSP - write-down of the Greek debt held by the public sector along the lines of the private sector bond write-down in the spring). The head of the S&D party at the European Parliament, Hannes Swoboda of Austria, said an OSP would be inevitable if a growth policy were not added to the spending cuts and structural reforms currently being recommended.
The following measures have been decided upon to cough up the cash needed to give Greece a breathing space for getting its budget back on track: a one percent cut in the interest rate on bilateral loans to Greece under the first bailout package from eurozone nations, except for the countries themselves receiving aid (Ireland and Portugal); a ten year payment holiday on interest on EFSF loans, whose maturity has been extended to 15 years; a 10 base points reduction in the cost of the guarantees paid by Greece on its EFSF loans; and a commitment by eurozone countries to pay back to Greece (into a blocked bank account that can only be used to service the debt) profits made on Greek bonds owned by eurozone central banks and the ECB. The combination of measures should reduce the Greek debt by around €40 billion.
In the future, new measures might be added, explained Rehn, such as further interest rate reductions and a cut in the co-financing requirements for aid from the EU Structural Funds.
Tough deal to boost confidence. The deal was “tough” and will require “significant effort from each,” said the head of Eurogroup, Jean-Claude Juncker, saying it was “not just about money,” but would ensure a “better future for the Greek people and the eurozone as a whole.” In the view of the head of the ECB, Mario Draghi, the agreement would allow confidence to be restored in Greece and the eurozone. Greek finance minister Yannis Stournaras said the same, noting that the decisions would lift the “uncertainty” that was hanging over the country. Moscovici said everyone would have to contribute, but it would not be so very expensive.
Le sérieux grec. The president of the European Commission, José Manuel Barroso, welcomed the sacrifices made by the inhabitants of Greece in this difficult time, efforts that he said would allow them to build a better future. Rehn said that this new start had been made possible by the fact that Greece was taking the reforms seriously. Describing the reforms as “extraodinarily difficult and ambitioius,” Moscovici pointed out that they had a “high social cost.” In addition to application of the reforms, there will be increased surveillance of the budget and servicing of the Greek debt. Any income raised from privatisation and 30% of the primary budget surplus will go into a blocked bank account set up to pay off the country's debt.
In Athens, the Greek prime minister, Antonis Samaras, said “A new day begins tomorrow for Greece.” Head of the socialist party in the coalition government, Evangelos Venizelos of PASOK, agreed that it was a new starting point for the country, while Fotis Kouvélis, the leader of Democratic Left (DIMAR), said the decisions would be “decisive” for keeping Greece in the eurozone. (EL and MB/transl.fl)