WASHINGTON Oct 12 The euro zone will have to decide over the next 12 months how to close a financing gap in the current Greek bailout, how to help the country cut its debt to sustainable levels and whether to lend it more money for 2015 and 2016.
The three issues are likely to be dealt with separately at different points in time, although the question for the euro zone is more about precisely how to help Athens, rather than if.
This is because euro finance ministers decided already on November 27, 2012 that they would provide "adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme."
So far, officials say that Greece is on track to have a primary budget surplus this year -- the main criterion for some form of further debt relief -- and seems to be broadly on track with other reforms too.
FIRST - THE 2014 FINANCING GAP
The first issue that euro zone ministers will have to tackle is a financing gap in the Greek bailout in the second half of 2014. The European Commission estimates this gap at 3.8 billion euros and the IMF, which co-finances the bailout, at 4.4 billion euros in 2014.
While the euro zone bailout ends at the end of 2014, the IMF programme runs until the beginning of 2016. To disburse aid to Greece the Fund needs to know that the euro zone programme is fully funded 12 months ahead.
This forces the euro zone to decide now, at the next meeting of finance ministers on November 11, where to find the missing money at least for the second half of 2014.
The gap was created by the refusal of euro zone central banks to roll over their holdings of Greek bonds maturing during the bailout, as initially envisaged by euro zone finance ministers, and lower than expected privatisation revenue.
The gap could be filled in several ways, officials said:
1. Greece can spend less and/or have higher tax revenues. This is tricky, because any further spending cuts by Athens would be politically very difficult and could be economically counterproductive. Higher tax revenue depends on the rate of economic growth, which is tough to precisely predict.
2. There are around 11 billion euros of so far unused bailout money that was originally earmarked for the recapitalisation of Greek banks. How much of that sum might still be needed to strengthen smaller Greek banks will be known only later this year. Redirecting the unused part of the money to fill the gap would be politically attractive, because it would not require parliamentary approvals in various euro zone countries where public opinion is strongly against lending more to Greece.
3. Greece could sell more state-owned assets. The success of that depends on demand for Greek assets. One of the ideas to accelerate the process is through securitisation of real estate.
4. Greece could issue short-term bonds. The success of that depends on market sentiment in late 2014.
5. The euro zone could lend Greece more money. This would be politically difficult, because it would require the approval of several national parliaments, including countries where there is strong opposition to any further lending.
SECOND - DEBT REDUCTION
Euro zone finance ministers promised that if Greece reaches a primary surplus for 2013, and meets all other conditions of the bailout, they would consider further help to make sure the debt falls substantially below 110 percent of GDP in 2022 from a peak of 175.2 percent expected this year.
While Greece seems on track to reach a primary surplus in 2013, this will be independently verified by the European Union's Statistics Office (Eurostat) only in April 2014 and the discussion on debt relief can take place only after that.
The IMF has called for the euro zone to simply write off some of the loans it has made to Greece, but this idea has no support in euro zone capitals.
Instead, EU Economic and Monetary Affairs Commissioner Olli Rehn has said, the relief is more likely to come in the form of further interest rate reductions and a lengthening of maturities of the loans. The average maturity of loans to Greece is already 30 years, but some officials have said these could be increased to, for example, 50 years.
THIRD -- ANOTHER BAILOUT FOR GREECE
When the current bailout programme expires at the end of next year, Greece is unlikely to be already able to fully fund itself on the market, euro zone officials have said.
In line with the euro zone finance ministers' statement from last November therefore, Athens is therefore likely to get further financial support.
How and how much will have to be decided in the second half of 2014, officials said.
"The general expectation in the market is that there will be a another programme," Klaus Regling, the head of the euro zone bailout fund ESM, told a seminar in Washington. "A third programme is probably needed. It seems likely that this might happen," he said. "My expectations would be very much like the previous programmes -- long maturities, and low interest rates."