Late deal between IMF and EU over next phase of Greek bailout

Europe and the International Monetary Fund struck a deal early this morning to settle a damaging schism over the next phase of the Greek bailout.

The agreement came shortly before 1am in Brussels, after 12 hours of talks between euro zone finance ministers and IMF chief Christine Lagarde.

“I very much welcome the decisions taken by the ministers of finance,” European Central Bank chief Mario Draghi told reporters in the moments after the agreement.

“The decision will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece.”

Mr Draghi did not provide details of the deal, though it was reported that it lowered the interest rate charged on loans made to Greece and profits made on Greek bonds by the European Central Bank would be returned to Athens, allowing the country to cut its debt. The ministers agreed that the interest rate on bilateral loans to Greece would be reduced by 100 basis points to 50 basis points above the cost of financing once Athens has reached a primary surplus of 4.5 percent of GDP.

Although many ministers had expressed hope that a deal was imminent, the talks dragged on for many hours longer than anticipated.

Greece is in danger of running out of cash and is reliant on emergency ECB support to stay afloat. At issue again was a push by Ms Lagarde for euro zone countries to bear losses on their financial support for the country.

Greece has been awaiting a delayed loan disbursement of €31 billion and the European Commission believes the country may need an additional €32.6 billion if its deficit-cutting deadline is extended by two years as discussed for months.

The IMF has long argued that debt reduction measures involving a “haircut” on the amount to be repaid – a process known as official sector involvement – are needed to bring the country’s debt to a “sustainable” level of 120 per cent of economic output by 2020.

But the euro zone powers baulked at that. A further source of tension is the IMF’s resistance to European pressure to extend until 2022 the deadline for achievement of a “sustainable” debt level.

There was speculation late last night, which remained unconfirmed, that Europe and IMF would settle a compromise debt target of 124 per cent.

In spite of the divisions between Europe and the IMF, a high-level European source said as the talks continued that it remained the intention to sign both camps up to the same plan.

The European ministers entered the talks having indicated their readiness to trim interest rates on Greek loans and forgo profit on the Greek bonds held by their national central banks for the ECB. Minister for Finance Michael Noonan indicated bailout recipients such as Ireland and Portugal would be exempted from such steps in respect of the aid they granted Greece before they entered their own rescue programmes.