After 12 hours of talks – and a third meeting – Eurozone finance ministers finally reached an early morning deal on Nov. 27 to relieve Greece’s crushing debt and pave the way for the release of $57 billion in long-delayed loans, although the funds will come in installments, according to Eurogroup’s statement.
Part of the agreement is that the target for Greece’s debt levels – one of the conditions of the deal going ahead – would reach 124 percent of its Gross Domestic Product by 2020, not the 120 percent target that had been set by the country’s lenders, the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) in return for the monies.
Mario Draghi, President of the ECB, said the agreement has settled, for now, the anguishing negotiations with Greece. “It will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece,” Draghi said.
The finance ministers from the 17 countries in the Eurozone – including Greece – had been unable for weeks to come to agreement on the best way to reduce Greece’s debt, even though Prime Minister Antonis Samaras had pushed through Parliament a $17.45 billion spending cut and tax hike plan demanded by the Troika. That includes more of the punishing pay cuts, tax hikes and slashed pensions that have worsened Greece’s five-year recession.
Without the pending aid, there were fears that Greece could have been pushed out of the Eurozone, threatening the financial bloc’s standing, a prospect that would have rattled world markets. Details of the plan were sketchy but the political agreement will have to pass scrutiny from the national parliaments in the other 16 Eurozone countries before the loans can be disbursed. Samaras warned that Greece has only until the end of the month before it runs out of cash.
While some aspects of the deal were still to be worked out, it should unlock the loan and give the Greek government needed to recapitalize banks pushed to the edge of insolvency by losses imposed by a former administration on investors. Samaras also promised that some 8 billion euros, or $10.4 billion, would be used to pay creditors, some of whom have been waiting for years to get paid. What’s left over will go to keep paying worker salaries and pensions.
Discussions were continuing on the methods to be used to lower the country’s staggering $430 billion debt, including a possible debt buyback and a lowering of interest rates on loans to Greece. “It’s going very slow, but we have financing and a debt sustainability analysis. We’ve filled the financing gap until the end of program in 2014,” one official engaged with the talks told the Reuters news agency.
STILL UP IN THE AIR
Greek Finance Minister Yannis Stournaras said earlier that the uneasy coalition government had met its part of the deal by enacting tough austerity measures and economic reforms, and it was now up to the lenders to do their part. Greece’s economy has shrunk nearly 25 percent in five years and is not expected to grow again for at least two years, despite the bailouts and debt reduction programs. Talks had stalled over how Greece’s debt, forecast to peak at 190 to 200 percent of GDP in the coming two years.
It remained unclear whether Greek debt can become sustainable without Eurozone governments having to write off some of the loans they have made. Reuters reported also that the IMF was still demanding immediate measures to cut Greece’s debt by 20 percent of GDP, with a commitment to do more to reduce the debt stock in a few years if Greece fulfills its program.
To reduce the debt to 124 percent by 2020, the ministers were putting together a package of steps including the debt buyback funded by a Eurozone rescue fund, reducing the interest rate on loans and returning 11 billion euros ($14.27 billion) in ECB profits to Greece, although Germany and its northern European allies have rejected forgiving official loans.
German Finance Minister Wolfgang Schaeuble told reporters that a debt cut was legally impossible, not just for Germany but for other Eurozone countries, if it was linked to a new guarantee of loans. “You cannot guarantee something if you’re cutting debt at the same time,” he said. That did not preclude possible debt relief at a later stage if Greece completed its adjustment program and no longer needs new loans.
The person familiar with IMF thinking said a loan write-off once Greece has established a track record of compliance would be the simplest way to make its debt viable, but other methods such as foregoing interest payments, or lending at below-market rates and extending maturities could all help.