Top euro policymakers at odds over Greek debt fix

HELSINKI/BRUSSELS Thu Nov 15, 2012 12:41pm EST

European Economic and Monetary Affairs Commissioner Olli Rehn addresses a news conference at the EU Commission headquarters in Brussels November 14, 2012. REUTERS/Francois Lenoir

European Economic and Monetary Affairs Commissioner Olli Rehn addresses a news conference at the EU Commission headquarters in Brussels November 14, 2012.

Credit: Reuters/Francois Lenoir

Related Topics

HELSINKI/BRUSSELS (Reuters) - The European Union's top economic official sought to rule out any write-off of Greece's debt to governments on Thursday after a European Central Bank policymaker said for the first time that a "haircut" on part of it was probable.

A row between euro zone governments and the International Monetary Fund over how to make Greece's giant debt mountain manageable is holding up the release of 31 billion euros ($39.5 billion) in emergency loans needed to keep Athens afloat.

IMF officials have argued that some write-down for euro zone governments is necessary to make Greece solvent but Germany, the biggest contributor to the bloc's bailout funds, has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal.

German Chancellor Angela Merkel said after talks with French Prime Minister Jean-Marc Ayrault that they had not discussed a Greek debt write-off and Berlin's position had not changed. They both called for an early solution.

"Of course we did not talk about debt haircuts, you know our view and that has not changed, nor should it," Merkel said.

EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Helsinki: "The solution will be a combination of various elements, one is not enough.

"But it is essential that the principal not be touched. There is a strict unanimity on this within the euro zone."

Rehn's comment contradicted ECB Governing Council member Luc Coene, who was quoted by a Belgian daily as saying that a partial write-down of Greek debt was likely to happen eventually.

De Standaard said Coene made the comments in a debate with students at Ghent University on Wednesday. He was also quoted as saying Spain should urgently seek a bailout.

Asked whether the Belgian central bank chief had been reflecting a growing view in the ECB that an official sector "haircut" on Greek debt was inevitable or speaking for himself, a senior ECB source said Coene had expressed his personal view.

Greece's total debt is forecast to rise to 190 percent of gross domestic product next year and seems highly unlikely to fall back to 120 percent of GDP by 2020, the level the IMF has said is the maximum sustainable in the long term.

Banks, insurers and other private investors holding about 206 billion euros of Greek bonds took a savage "haircut" on the nominal value of their securities earlier this year.

HAIRCUT

The euro zone's debt crisis began in Greece three years ago when a newly elected government disclosed that the country had knowingly understated its budget deficit.

Athens managed to sell nearly 1 billion euros in short-term bills on Thursday to complete raising the 5 billion euros it needs to pay off maturing paper on Friday and avoid default.

But the government desperately needs the next tranche of its international bailout loans to recapitalize its banks and pay civil servants and suppliers.

A senior euro zone source told Reuters on Wednesday that finance ministers of the 17-nation currency area would only attempt to close Greece's financing gap to 2014 when they meet again in Brussels next Tuesday, instead of finding a solution up to 2020 as sought by the IMF. [ID:nL5E8MEEF0]

"We will concentrate on 2013 and 2014. The sum is about 13.5 billion euros ($17.2 billion)," said the source involved in negotiations, speaking on condition of anonymity.

That might postpone a longer-term solution to the Greek debt problem until after a September 2013 German general election, but it may not be acceptable to the IMF.

IMF Managing Director Christine Lagarde clashed publicly with the chairman of euro zone finance ministers this week, saying the global lender differed with the Europeans on how to make Greece's debt sustainable.

She insisted on Wednesday that the IMF, which put up almost a third of the money lent to Greece in two bailouts, wanted a "real fix, not a quick fix" to the issue, suggesting she will take a dim view of a shorter-term solution.

An IMF spokesman accompanying Lagarde in Manila said she would cut short a visit to Asia to attend next Tuesday's crucial Eurogroup meeting in Brussels.

In Washington, another IMF spokesman said the Fund had done what it could to help Greece reach debt sustainability and "clearly there has to be other actions taken to reach debt sustainability", putting the onus on the European lenders.

Senior euro zone officials will hold a preparatory conference call on Friday to try to narrow differences. Among ideas under consideration to plug the funding gap are further reducing the interest rate and extending the maturity of euro zone loans to Greece, a possible interest payment holiday and bringing forward loan tranches due at the end of the programme, euro zone sources said.

"IMF COMMITTED"

Under its standard procedures, the IMF cannot go on disbursing loans unless an adjustment programme is fully funded up to the end.

Euro zone ministers agreed on Monday to grant Greece an extra two years, until 2016 to meet its fiscal targets, which the international lenders said would cost an extra 32 billion euros.

The dispute has called into question whether the IMF will remain in the Greek programme.

But Rehn said: "The IMF has committed to support Greece according to the programme, which was agreed together with the euro zone. There is no reason to suspect that the IMF would not cooperate also in the next stage of Greece's financing programme.

"We know that many member countries view IMF participation, also financing, as a prerequisite for euro zone supporting Greece with these loan programmes," the EU official said.

"Because of this, it is not possible, even in principle, that the euro zone would act without the IMF." ($1 = 0.7856 euros) (Additional reporting by Ritsuko Ando in Helsinki, Lefteris Papadimas in Athens, Annika Breidthardt, Stephen Brown and Andreas Rinke in Berlin, Jan Strupczewski in Brussels, Martin Santa in Bratislava and Lesley Wroughton in Kuala Lumpur; writing by Paul Taylor, editing by Mike Peacock)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (3)
scythe wrote:
face the facts, greek economic governance does not have much support from other eurozone politicians and decision makers

and it has zero support from the greek population itself

the only “writedown” happening is in the news headlines

Nov 15, 2012 10:20am EST  --  Report as abuse
dareconomics wrote:
Politicians are human beings, and our species excels at saying one thing and doing another. The troika is squabbling amongst themselves about Greek debt sustainability and has reached an impasse. This is the IMF’s position:

“We want a real fix, not a short-term fix,” IMF spokesman William Murray told reporters in Washington today.

“Critical to us is Greece’s debt sustainability,” Murray said. “That means that by 2020 we want to see Greece’s debt at 120 percent of its gross domestic product.”

In order to achieve that goal, the debt will have to be written down further. Contrast that to the Eurozone’s position:

Germany, the biggest contributor to the bloc’s bailout funds, has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal.

The Eurozone has also delayed the 120% sustainability date to 2022 without the IMF’s consent.

The ECB sides with the IMF believing that a further write-down of Greek debt is inevitable.

Regardless of what anyone is saying, negotiations are deadlocked. IMF President Christine Lagarde is even cutting off a trip so that she can attend a Eurozone finance ministers meeting next week.

For political reasons, the German-led Eurozone does not wish to write down Greek debt. Since this is really the only way to achieve a supposedly sustainable Greek debt load of 120% of GDP by 2020, further can kicking is being considered.

The Germans wish to only consider the plan up until 2014, just long enough to get past elections and much cheaper to boot.

The IMF is against further can kicking and wants a long-term solution to get Greece on track for sustainability.

Once again, brinkmanship politics rule the day, which is what the 4th Iron Law of the Eurocrisis tells us to expect.

Over the next few weeks, the IMF and Eurozone will stare each other down. As Greece gets closer to running out of money, the markets will begin having a tantrum. Then, cooler heads will prevail and a face-saving agreement will be negotiated. This can will be kicked again.

dareconomics.wordpress.com

Nov 15, 2012 2:05pm EST  --  Report as abuse
dareconomics wrote:
Politicians are human beings, and our species excels at saying one thing and doing another. The troika is squabbling amongst themselves about Greek debt sustainability and has reached an impasse. This is the IMF’s position:

“We want a real fix, not a short-term fix,” IMF spokesman William Murray told reporters in Washington today.

“Critical to us is Greece’s debt sustainability,” Murray said. “That means that by 2020 we want to see Greece’s debt at 120 percent of its gross domestic product.”

In order to achieve that goal, the debt will have to be written down further. Contrast that to the Eurozone’s position:

Germany, the biggest contributor to the bloc’s bailout funds, has repeatedly rejected the idea of taking a loss on holdings of Greek debt, saying it would be illegal.

The Eurozone has also delayed the 120% sustainability date to 2022 without the IMF’s consent.

The ECB sides with the IMF believing that a further write-down of Greek debt is inevitable.

Regardless of what anyone is saying, negotiations are deadlocked. IMF President Christine Lagarde is even cutting off a trip so that she can attend a Eurozone finance ministers meeting next week.

For political reasons, the German-led Eurozone does not wish to write down Greek debt. Since this is really the only way to achieve a supposedly sustainable Greek debt load of 120% of GDP by 2020, further can kicking is being considered.

The Germans wish to only consider the plan up until 2014, just long enough to get past elections and much cheaper to boot.

The IMF is against further can kicking and wants a long-term solution to get Greece on track for sustainability.

Once again, brinkmanship politics rule the day, which is what the 4th Iron Law of the Eurocrisis tells us to expect.

Over the next few weeks, the IMF and Eurozone will stare each other down. As Greece gets closer to running out of money, the markets will begin having a tantrum. Then, cooler heads will prevail and a face-saving agreement will be negotiated. This can will be kicked again.

dareconomics.wordpress.com

Nov 15, 2012 2:05pm EST  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.