Decision day for second Greek bailout despite financing gaps

Euro zone finance ministers are expected to approve a second bailout for Greece on Monday to try to draw a line under months of uncertainty that has shaken the currency bloc, although there is work to be done to make the figures add up.

Diplomats and economists say they do not expect the package to resolve Greece's economic problems. That could take a decade or more, a bleak prospect that brought thousands of Greeks onto the streets to protest austerity measures again on Sunday.

The ministers need to agree new measures to square the numbers, given the ever-worsening state of the Greek economy. But they say an agreement on Monday will help restructure the country's vast debts, put it on a more stable financial footing and keep it inside the 17-country single currency zone.

Senior officials from euro zone finance ministries and the European Central Bank held a conference call on Sunday to go over the final details of the 130-billion-euro ($171-billion)program, including a debt sustainability analysis critical to the International Monetary Fund.

While there is skepticism in Germany and other countries that Greece will be able to live up to its commitments - including implementing 3.3 billion euros of spending cuts and tax increases - officials said momentum was building for approval of the deal.

French Finance Minister Francois Baroin said all the elements were in place to reach an agreement.

"It cannot wait any longer ... Greece has debt payments in March and could find itself in bankruptcy, something which France has been trying to avoid for the last 18 months," he told Europe 1 radio on Monday.

Finnish Finance Minister Jutta Urpilainen said Greece had done all that had been asked of it.

"There are many open details ... A big issue is that we have to get Greece's debt on a level that is sustainable and enables Greece to survive," she told reporters in Helsinki.

A euro zone official in contact with junior ministers involved in the Sunday conference call said the financing gaps were not so large that they risked derailing the whole process.

"I don't see anybody wanting to be responsible for pulling the plug on the deal at this late stage," he said.

"The gut feeling is that this is going to go through - everyone feels the pressure this time to deliver," he said, indicating that the Netherlands, Finland and Germany, which have been the most critical of Athens' ability to commit, looked likely to come on board if the financing gaps could be closed.

Greek Anger Unabated

Several thousand Greeks demonstrated on Sunday against the austerity measures to reduce the country's debt, although the numbers were much lower than earlier protests.

Greek Prime Minister Lucas Papademos flew to Brussels for last-minute preparations as about 3,000 demonstrators massed on the capital's central Syntagma square.

Riot police shielded the national assembly to prevent a repeat of riots a week ago when masked youths torched buildings and looted shops across Athens.

Under one crucial element of the deal, Greece will have around 100 billion euros of debt written off via a restructuring involving private-sector holders of Greek government bonds.

Banks and insurers will swap bonds they hold for longer-dated securities that pay a lower coupon, resulting in a real 70 percent reduction in the value of the assets.

The bond exchange is expected to launch on March 8 and complete three days later, Athens said on Saturday. That means a 14.5-billion-euro bond repayment due on March 20 would be restructured, allowing Greece to avoid default.

The vast majority of the funds in the 130-billion-euro program will be used to finance the bond swap and to ensure that Greece's banking system remains stable: 30 billion euros will go to "sweeteners" to get the private sector to sign up to the swap, 23 billion will go to recapitalize Greek banks.

A further 35 billion will allow Greece to finance the buying back of the bonds, and 5.7 billion will go to paying off the interest accrued on the bonds being traded in.

The overall objective is to reduce Greece's debts from 160 percent of GDP to around 120 percent by 2020 - the figure and timeframe that the IMF, ECB and the European Commission, together known as the troika, have established as sustainable.

Meeting the Target

The focus of Monday's finance ministers' meeting will be what "around 120 percent" means in practice.

A debt sustainability report delivered to euro zone finance ministers last week showed that under the main scenario, Greek debt will only fall to 129 percent by 2020.

The IMF has said if the ratio cannot be cut to around 120 percent, it may not be able to help finance the Greek program.

U.S. Treasury Secretary Tim Geithner urged the International Monetary Fund to support the program.

"This is a very strong and very difficult package of reforms, deserving of support of the international community and the IMF," Geithner said in a statement on Sunday.

As well as working to get the number down, there are moves to convince members of the troika that a debt level of 123-125 percent in 2020 would be sustainable.

"If we can get it down to 123 or 124 percent, I think everyone's going to be okay with that," the euro zone official said after the Sunday conference call. "Everyone will find a way to tweak the numbers."

A number of measures, including restructuring the accrued interest portion or reducing the "sweeteners," are being considered to move the figure closer to 120, a euro zone official familiar with the negotiations said.

There are also discussions about marginally lowering the interest rate on 110 billion euros of bilateral loans already made to Greece in May 2010 - the first package of support - to lighten the financing burden on Athens.

Central banks could help too.

The ECB is weighing up whether to allow Greek bonds held in euro zone central banks' investment portfolios to be subject to the same writedowns private investors are set to take, central bank sources told Reuters on Friday.

The central banks hold around 20 billion euros of Greek bonds in their traditional investment portfolios and the ECB holds about double that amount from its emergency bond-buying program. It has also signaled it could forego the profits made on the latter at some point.

If the finance ministers do succeed in reaching an agreement, it will provide immediate relief to Athens and financial markets, which have been kept guessing since the bailout package was announced last October.

But no one is pretending it will end Greece's problems. Figures last week showed its economy shrank 7 percent year-on-year in the last quarter of 2011, much more than expected, with further cuts likely to make matters worse.

The troika, responsible for monitoring Greece's reform progress, carries out quarterly reviews, while the European Commission will soon have dozens more monitors on the ground.

Already there is concern that at any one of those reviews of the new program - if it is approved on Monday - Greece will be found to be behind, especially if GDP continues to slump.

That will again raise the threat the country will have to default if it cannot meet its obligations, and invite questions about its ability to remain in the euro zone.

($1 = 0.7597 euros)

[Source: By Luke Baker, Reuters, Brussels, 20Feb12]

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