DAVOS, Switzerland (Reuters) - The European Union’s top economic official said on Thursday that more public money will be needed to make up a shortfall in a second bailout for Greece if private bondholders agree to take a share of losses.
Economic and Monetary Affairs Commissioner Olli Rehn told Reuters that euro zone governments and EU institutions would need to make up the difference so that Greece’s public debt can be reduced to close to 120 percent of annual output by 2020.
Rehn said he expected Athens to reach agreement with private sector investors in the coming days on a debt swap under which they would take voluntary writedowns on Greek bonds.
“In fact, we’re quite close to a deal between the Greek government and the private sector community. I would expect it will be concluded in the coming days, preferably still in January, not February,” he told Reuters Insider television in an interview.
The EU and the International Monetary Fund would then update their analysis of Greece’s debt sustainability to identify the shortfall to reach the agreed 2020 target in the light of Athens’ worsening economic outlook and fiscal performance.
“We are preparing a package which will pave the way for a sustainable solution for Greece, and in that package, yes, on the basis of the revised debt sustainability analysis, there is likely to be some increased need of official sector funding, but not anything dramatic,” Rehn said.
Asked whether the European Central Bank should take a share of the burden by renouncing profits on Greek bonds it had bought at a discount on the secondary market, he said he did not wish to speak on behalf of the ECB.
But the required burden-sharing would depend on decisions made by “the official sector and European institutions.” The ECB is the only European institution which holds Greek debt.
It was the first time a top EU official had spelled out that more public money than the planned 130 billion euros would be required for a second Greek bailout package.
Germany, France and other euro zone states have so far described the 130 billion figure agreed in October as a red line that must not be crossed.
Rehn declined to say how big the funding shortfall would be. However, EU officials told ministers that a private sector offer which they rejected on Monday would have brought Athens’ debt down to just below 130 percent of Gross Domestic Product.
The EU officials said private bondholders were likely to accept a lower interest rate on new Greek bonds to clinch a deal, despite their public statements to the contrary.
That could bring the projected 2020 debt down to about 125-127 percent, leaving roughly an additional 5 percent of GDP to be found by governments and/or the ECB.
That would amount to a funding shortfall of 12 to 15 billion euros — roughly the amount of profit that the ECB would make if all the Greek bonds it bought at a discount were redeemed at face value, an EU source said.
ECB sources say the central bank is divided over whether it should be prepared to forego its profits on Greek bonds.
Rehn said the next task for the euro zone after sealing a Greek deal was to reinforce its financial firewalls.
German Chancellor Angela Merkel deflected calls to put more money into the currency bloc’s rescue fund in a speech at Davos. But Rehn said he trusted all member states were ready to further reinforce financial firewalls once other elements, including a fiscal compact for stricter budget discipline, came together.
Writing by Paul Taylor, editing by Kirstin Ridley