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Euro Finance Officials Meet to Jump-Start Greece Accord

By Patrick Donahue
November 19, 2012 12:03 PM EST 13 Comments
International Monetary Fund Director Christine Lagarde took issue with European governments’ decision to push back Greece’s debt-reduction target by two years to 2022 against the fund’s recommendations.
Photographer: Kiyoshi Ota/Bloomberg
International Monetary Fund Director Christine Lagarde took issue with European governments’ decision to push back Greece’s debt-reduction target by two years to 2022 against the fund’s recommendations.

European finance officials met in Paris today to forge a common position on Greece’s next aid payment as a sputtering economy and a spat with the International Monetary Fund cloud efforts to resolve the crisis.

Finance officials from France, Germany, Italy and Spain convened a day before a meeting of the 17 euro nations in Brussels, according to a European Union aide. EU Economic and Monetary Affairs Commissioner Olli Rehn also attended. Lengthening maturities on Greek debt and lowering rates on the country’s bailout loans are the main options being discussed to plug a funding gap, said the official, who declined to be named because the talks aren’t public.

The discussions on Greece are “likely to be tense as all players set out their positions,” Thomas Costerg, an economist at Standard Chartered in London, said in an e-mail. “Greece’s debt can is likely to be kicked further down the road, but we could see some constructive statements.”

The Brussels gathering, the second in a week after finance chiefs agreed seven days ago to keep Greece’s bailout aid flowing, underscores skirmishing among EU officials confronting rising unemployment and a slowing economy. In addition to a tussle between the EU and IMF over extending Greece’s debt target, the ministers are struggling to re-engineer the bailout without putting up more money.

European Conflict

Spokesmen for the German, Spanish, Italian and French finance ministries declined to comment on today’s talks.

With tens of thousands of Europeans staging protests last week against austerity measures and unemployment, shifting dynamics in other European countries could foreshadow renewed conflict -- an early election in Italy, a regional vote in Spain and an approaching bailout package for Cyprus.

Greek bonds rallied for a seventh day as analysts at Commerzbank AG, BNP Paribas SA (BNP) and Societe Generale (GLE) speculated the finance ministers will achieve their aims. The yield on 10- year Greek notes fell 29 basis points to 17.18 percent.

The talks may result in aid of about 44 billion euros ($56 billion), which would bundle a 31.5 billion-euro tranche for bank recapitalization that has been on hold for six months with two others due before year end.

Three Tranches

“You’ll run up three tranches by the end of the year,” German Finance Minister Wolfgang Schaeuble said last week. “All the more important, then, that we negotiate a suitable control mechanism. And that is among the points for which we’ll be seeking a solution together over the next few days.”

Greek Finance Minister Yannis Stournaras declined to comment yesterday when asked if Greece would get a green light tomorrow.

Luxembourg Prime Minister Jean-Claude Juncker, who oversees the finance chief meetings of the 17 euro nations, last week predicted a “definite decision” on releasing the next aid payment. He said the ministers might have to consult once more, possibly by teleconference, by the end of November to formally sign off on the updated rescue package.

Euro finance ministers need to plug a Greek financing gap they had a role in creating without putting up additional funds. In addition to the extension on debt reduction, Greece was given another two years to meet its deficit-reduction targets, leaving the shortfall.

ECB Holdings

Ministers are also discussing using profits on Greek bonds held by the European Central Bank to boost Greece’s debt sustainability target, Finnish Finance Minister Jutta Urpilainen said. “We’re currently negotiating on what the whole picture will look like,” Urpilainen said in an interview in Helsinki today. “The situation is live.”

The Brussels talks precede a Nov. 22-23 EU summit to resolve the bloc’s budget, a project threatened by a dispute with the U.K.

IMF Director Christine Lagarde took issue with European governments’ decision to push back Greece’s debt-reduction target by two years to 2022 against the fund’s recommendations, raising questions over whether the IMF would keep financing Greece.

Lagarde, who cut short a visit to Southeast Asia to return to Europe, signaled a potential clash in an interview in Manila on Nov. 17 by saying she’ll defend the IMF’s credibility.

Debt Target

Lagarde said that she was approaching the talks feeling “patient and resilient.” Even so, “we never leave the table,” she said when asked about dropping support.

The IMF target is for a reduction of Greece’s debt to 120 percent of gross domestic product by 2020, from a projected peak of 190 percent of GDP in 2014. An agreement on what qualifies as sustainable debt in Greece is required to plug a finance gap of as much as 32.6 billion euros ($42 billion).

Greece will probably need another aid package for after 2014, European Central Bank Board Member Joerg Asmussen said in an interview with German broadcaster ZDF yesterday.

Even though European leaders have pledged to do all they can to avert a Greek exit from the single currency, they’ve refused to return to parliaments for more funding. Finnish Premier Jyrki Katainen, speaking on YLE Radio Suomi at the weekend, again rejected further funds to Greece.

Schaeuble told reporters last week that the current package could be re-jigged by cutting rates on loans or giving Greece extra time. In an interview on ARD television yesterday, he reiterated his rejection of a third option: write-offs of the country’s debt held by public institutions.

Greece, which has already undergone the biggest sovereign restructuring in history after private investors forgave more than 100 billion euros of debt in March, may need another write- off, European Central Bank Governing Council member Jens Weidmann said at an event in Berlin on Nov. 16.

To contact the reporter on this story: Patrick Donahue in Berlin at pdonahue1@bloomberg.net

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

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