Greek Rescue Deal Falters on Loan Rate Cut

The show must go on

By Jonathan Stearns

The main obstacle to unlocking international loans for Greece is a plan to reduce the interest rates charged by euro-area creditors as the sides agreed to ease debt-reduction targets, a Greek official said.

A cut in interest rates would put them below the cost of funding for some euro-area countries, the official told reporters late yesterday in Brussels on the condition of anonymity. Policy makers will continue work on an updated aid package for Greece into this weekend in preparation for a Nov. 26 meeting of euro finance ministers, said the official.

An agreement, which would unlock an aid payout of at least 31 billion euros ($40 billion), may raise Greece’s debt target to 124 percent of gross domestic product in 2020 from a previous goal of 120 percent, said the official. The cost of reaching the new target from a currently projected trajectory of 129 percent of GDP that year is about 10 billion euros, according to the official.

The option of a Greek debt buyback funded by loans from the euro area’s temporary rescue fund -- the European Financial Stability Facility -- is part of the talks, according to the official.

Greek bonds have rallied for 10 days on speculation aid will keep flowing even after finance ministers failed twice this month to seal the deal. Yields on 10-year notes fell to 16.36 percent yesterday, the lowest since the nation’s debt was restructured in March.

Greek Recession

Greece, facing a sixth year of recession in 2013, has been negotiating with the euro area and International Monetary Fund over the steps needed to qualify for the release of loan installments frozen since June. At stake is whether the Greek government of Prime Minister Antonis Samaras can pay its bills, recapitalize domestic banks and stay in the 17-nation euro.

Earlier this month, the Greek parliament approved extra austerity measures demanded by the country’s international creditors. The measures include a 2013 budget to shrink the spending gap further.

The IMF has insisted that the government cut its debt to 120 percent of GDP, a level it considers sustainable.

“We have done our part,” Samaras told reporters as he arrived for the Brussels meeting of European Union leaders on the future EU budget. “Now it is our European partners and the IMF’s turn to deliver as well.”

Greece narrowed its budget deficit from more than 15 percent of GDP in 2009 -- five times the EU limit -- to 9.4 percent in 2011. The spending gap is due to shrink to below 7 percent of GDP this year and to almost 5 percent in 2013.

Greece received a 110 billion-euro rescue in 2010 and a further aid package of 130 billion euros earlier this year. The second bailout also included the biggest writedown of privately held debt.