Euro-area governments closed in on a deal to unlock a 130 billion-euro ($171 billion) aid package for Greece, seeking to avert the region’s first sovereign default.
Germany, the biggest country contributor to euro-area rescues, signaled that finance ministers may be ready to back Greece’s second bailout in two years when they meet Feb. 20 in Brussels. After a week of wrangling among euro-area officials, Chancellor Angela Merkel’s government indicated it aims to avoid splitting the timetable of the aid and a writedown of Greek debt to private bondholders and agree to the deal as one package.
Greece’s struggle to give assurances on debt-reduction goals through the end of the decade have heightened uncertainty as the clock ticks toward a March 20 bond redemption when Greece must pay 14.5 billion euros or trigger the first sovereign default in the euro’s 13-year history. The Brussels gathering on Feb. 20 is due to start at 3:30 p.m. instead of the usual 5 p.m.
“The ongoing saga will likely go down to the wire and is, yet again, another reminder of the fragile nature of the state of affairs in Europe and the potential for a disorderly default,” Michael Gapen, a New York-based economist at Barclays Capital, said in a note today.
Germany has led pressure on Greek Prime Minister Lucas Papademos to enforce austerity in his country, stoking recrimination between Europe’s southern countries and their northern creditors. Greece’s economy, stuck in what is predicted to be a fifth year of recession, shrank 7 percent
In focus over the weekend will be role of the European Central Bank as it holds talks with Greece over exempting Greek bonds in national central banks’ investment portfolios from a debt restructuring, two euro-area officials said.
Investors anticipating a conclusion of the seven-month effort to complete the second bailout for Greece sent the euro and global stocks higher this week. The euro rose 0.2 percent to $1.3150 as of 6:58 p.m. in Berlin after earlier gaining as much as 0.5 percent.
Merkel, Papademos and Italian Prime Minister Mario Monti discussed plans for a second Greek bailout in a conference call today and are confident that finance ministers will “find a solution to open questions” when they meet in Brussels, Steffen Seibert, Merkel’s chief spokesman, said in a statement.
While Greek lawmakers this month passed austerity measures that are required for the aid, euro-area finance ministers heard on a Feb. 15 conference call that Greece would miss debt-reduction goals without further measures. Greece’s debt would fall to 129 percent of gross domestic product in 2020, missing a target of 120 percent, said three people familiar with the talks who declined to be named because they are still in progress. Last year, the level was about 160 percent.
German Finance Minister Wolfgang Schaeuble signaled flexibility on that target, saying during a panel discussion in Stuttgart today that “the 120 percent may be 122 percent or 123 percent, it mustn’t be 130 percent.”
“It will definitely take until Sunday night” to resolve the outstanding questions, Finance Ministry spokesman Martin Kotthaus told reporters in Berlin.
Keeping the bond swap on track may hinge on the ECB. The bank is swapping its Greek bonds for new ones to ensure it isn’t forced to take losses in any debt restructuring, three euro-area officials said on Feb. 16. The move may be completed by Feb. 20, the officials said.
That could pave the way for a private-sector bond swap that aims to slice about 100 billion euros off Greece’s debt alongside the second bailout. More controversial is a proposal for national central banks to take part in the private exchange by accepting losses on Greek bonds in their investment portfolios.
“Markets are likely anticipating a positive outcome with voluntary participation of the private sector and possibly some ECB involvement,” Silvio Peruzzo, an economist at Royal Bank of Scotland in London, said by e-mail. Even so, “Greece is likely to remain a key risk for the euro area as the implementation of the program feeds the theme of exit from the monetary union.”
Euro officials are targeting a window of Feb. 22 to March 9 to complete the swap transaction, German lawmakers were told during a briefing by government officials yesterday.
Collective Action Clauses
The Greek government is meanwhile drawing up legislation that could be used to impose losses on investors who don’t support the debt swap, according to two euro-region officials familiar with the situation. The law may be introduced to parliament in Athens in the coming days, said one of the officials. Finance ministers are prepared to back the use of so-called collective action clauses if the voluntary swap doesn’t draw enough participation, the other person said.
The bond exchange can only go ahead once governments authorize the European Financial Stability Facility to provide 30 billion euros, to be used in cash or collateral as an incentive to investors.
With Greece’s ability to honor its debt-cutting pledges still in question, finance ministers may again withhold approval of the bailout even if they back the bond exchange, Citigroup Global Markets analysts said. That would push the dispute closer to a March 1-2 summit of European leaders.
Holding back euro-area policy makers is “widespread skepticism about the credibility of Greece’s political system as a whole and its ability to implement what has already been agreed,” Nomura Global Economics analysts said.