Race to fix Greek debt relief gathers pace
Officials took the first steps Tuesday in a high-pressure bid to wrap up a massive debt relief deal for Greece within a week.
Needed to save the country from financial collapse, pressure to accelerate action and reach a deal has also risen with experts predicting that Portugal may need its own restructuring or second bailout later this year.
The goalposts are moving fast, as seen when French Finance Minister Francois Baroin told his parliament that a deal with private creditors may now only reduce Greece’s debt to 125 percent of gross domestic product (GDP).
Missing the 120-percent target set by the European Union and International Monetary Fund in October would represent a relaxation of the terms.
“We are close to the goal,” Baroin told lawmakers, “the goal of reducing Greece’s debt level compared to gross domestic product to 120 percent or 125 percent.”
Late on Monday night, European Union president Herman Van Rompuy ended a summit overshadowed by the return of the Greek crisis by calling for deals on a debt writedown and a new 130-billion-euro ($172 billion) rescue package “a week from now”.
Greek Prime Minister Lucas Papademos set a similar target amid complex negotiations aimed at slashing 100 billion euros from the country’s 350-billion-euro debt mountain.
“It’s too early now to say we need some extra funding,” Papademos added. “Our goal is to avert it.”
The deadline is set in effect by legal constraints involved in a bond exchange that will be the mechanism for the debt writedown and which needs to begin on February 13 to be completed before Greece faces a major bond redemption in March.
Greece would likely end up defaulting when it must repay 14.5 billion euros on March 20 unless a debt deal is completed, which is also a prerequisite for the second rescue package.
But European stock markets rose Tuesday, recovering ground lost the previous day as reports of progress in Greek debt talks buoyed sentiment.
The European Central Bank (ECB), eurozone governments and other EU institutions holding Greek bonds are nonetheless under growing pressure to accept losses.
An EU official said the aim would be to negotiate an Official Sector Involvement (OSI) programme after the completion of the Private Sector Involvement (PSI) deal.
IMF chief Christine Lagarde said last week that official creditors would need to pull more weight if the deal with private creditors doesn’t reduce Greece’s debt level to 120 percent of GDP by 2020.
The IMF needs assurance a country’s medium-level debt dynamics are sustainable in order to continue lending.
Concerns are rising that Greece may again spark contagion, which eventually pushed Ireland and Portugal into bailouts, with Lisbon seen as being under most threat.
Portuguese Prime Minister Pedro Passos Coelho said on leaving the Brussels summit that the key for the moment is “to reduce the external pressure which stems from contagion due to the picture with Greece.”
Analysts are increasingly focused on this additional headache for policymakers.
“Portugal will likely access the European Stability Mechanism in the second half of 2012,” said Padhraic Garvey, a bond market analyst with ING bank, of the EU’s permanent rescue fund still being set up.
Portugal agreed a 78-billion-euro bailout last May, but the country’s borrowing costs remain stubbornly high.
Garvey maintains that the return of contagion means the European Central Bank cannot participate in any OSI scenario.
Put simply, he says this would “kill” the central bank’s eurozone bond-buying spree, begun at the time of the first Greek bailout and needed “to help firewall Italy and Spain should things turn nasty again” for recession-hit Madrid and Rome.
With Italy and Spain still fragile, EU leaders will discuss in March whether to boost the size of the ESM above 500 billion euros.
Access to this fund, however, will also be conditional on ratification of another treaty agreed at the summit to cap deficits and debts among 25 of the 27 EU states, what ECB chief Mario Draghi termed a “first step toward a fiscal union.”
In Ireland, Deputy Prime Minister Eamon Gilmore said Tuesday that the government’s chief legal officer will now rule as to whether a referendum is required to ratify it there, a difficult political hurdle for Dublin.
French presidential election contender Francois Hollande has also said he would re-negotiate the treaty were he to win power, placing another potential shadow over implementation for a pact shunned by Britain and the Czech Republic.