EURO ZONE finance ministers last night agreed to release a crucial €8 billion rescue loan to Greece, a move which comes as EU leaders ready a risky plan to increase the investor losses in its second bailout.
The ministers said the new loan would be released to Greece in the first half of November, pending approval by the board of the International Monetary Fund.
Greece needs this money to avert bankruptcy, but the payment was delayed for weeks amid disputes between the EU-International Monetary Fund troika over the failure of the government to execute promised reforms.
Attention has now shifted to new arrangements in the country’s second bailout to increase the losses borne by creditors.
The ministers said the second rescue will include “an appropriate combination of additional new official financing and private sector involvement”. However, there was no agreement on the extent of losses to be imposed on the country’s private creditors.
EU authorities have been angling to increase the “haircut” to some 50 per cent from 21 per cent in the original deal agreed in July.
However, a senior European diplomat said the IMF has been arguing for a loss of up to 60 per cent as it believes the economic projections from the EU Commission to be too optimistic.
Crucial in this debate is a new report on Greece’s debt from the troika which says that bigger investor losses will be required to bring its debt back to a sustainable footing.
The financial situation in Greece has taken a “turn for the worse” since June, the report said. “Large, long-term, and sufficiently generous official support will be necessary for Greece to remain current on its debt service payments and to facilitate a declining debt trajectory.”
These findings provide grounds for EU leaders to seek deeper bondholder “haircuts” than in July.
They aim to reduce Greek debt some 120 per cent of gross domestic product. The troika’s report said this was possible by the end of 2020 if a 50 per cent haircut is achieved.
Diplomats and officials believe the ministers will leave the final determination of the haircut to EU leaders. They meet for a summit tomorrow in Brussels and another summit on Wednesday in an attempt to agree a contentious “grand bargain” to settle the crisis.
The senior European diplomat said it remained the leaders’ intention to ensure that losses incurred by Greek creditors would be taken on a “voluntary” basis.
Their objective here is to avoid a “credit event”, triggering payments under insurance policies known as credit default swaps, and to avert any resultant contagion.
Talks are again under way with the Institute of International Finance, the global banking lobby with which the EU authorities agreed the initial terms of the second bailout in July.
The institute, which represents some of the world’s biggest banks, has been resisting pressure to increase the haircut. European negotiators hope to conclude a new arrangement by the summit next Wednesday.
Given their anxiety to ensure the deal is voluntary, EU leaders are unlikely to sign off on new deal until then.
Their decision will have a bearing on the level of new capital required to bolster weakened euro zone banks, which are likely to receive about €90 billion under criteria endorsed by the European Banking Authority.
The proposed expansion of the European Financial Stability Facility has triggered a serious rift between Germany and France.