Greece still the word as leaders get 15 day extension

Greek ministers failed to come to an agreement on 300m euros worth of spending cuts last night. Are they finally in the last-chance saloon?

by Emma Haslett
Last Updated: 06 Nov 2012
When is a deadline not a deadline? When Greek leaders are trying to negotiate €300m worth of austerity measures. We know – these days, €300m is mere pocket money – but the sum is the final piece in the country’s €3bn austerity puzzle, needed for the ‘troika’ of the European Central Bank, the European Commission and the International Monetary Fund to approve a €130bn rescue package, thus allowing it to avoid default (for the time being, at least). The Greeks spent all night negotiating but failed to agree on measures. The good news is that they’ve been given another 15 days to think about it. Not that extending the deadline has helped much in the past…

The sticking point seems to be proposals for ‘deep’ cuts to pensions. It’s a contentious issue in Greece, because the recession has hit the elderly harder than any other group. Thus, far-right party leader George Karatzaferis apparently walked out of negotiations halfway through (although, to be fair, he might just have needed a good night’s kip). Conservative leader Antonis Samaras was equally unhappy about the idea of cuts to supplementary state pensions, while former Greek PM George Papandreou refused to join in any discussions over alternatives of cutting primary pensions.

The trouble with all this, though, is that even if the €130bn is approved, not everyone’s convinced it’ll be enough to cut debts from 160% of GDP to just 120% by 2020. Part of that, say critics, is because the ECB has stubbornly refused to take any haircut on the Greek debt it holds – so while private bondholders have to accept a 50% writedown on their bond yields, the ECB will still get the agreed amount.

That leads to something of a dilemma for the IMF. If the ECB were to agree to give up its profits, it would take as much as €15bn off the amount Greece has to repay. Without that, there are concerns it’ll be impossible to cut Greece’s debt levels much beyond 130% by 2020. The problem there is that unless European leaders can come up with a way to cut it to 120%, the IMF won’t give the go-ahead to the €130bn rescue package. Which means that, when a raft of Greece’s debts mature on March 20, the country will have no choice but to default.

To be fair, there is another suggestion being mooted by European officials: the idea is that Greece would buy bonds directly from the ECB, using money (or bonds) from the European Financial Stability Facility, the European bailout fund. But that idea has its own problems (besides sounding unnecessarily complex): it would require eurozone governments to pledge even more money to the EFSF. Which, politically, would go down like a lead balloon across most of Europe.

There’s a meeting of European finance ministers this afternoon, at which they’ll be required to approve the bailout (whether that will happen in practice is another question). Unperturbed that he might find himself the target of icy glares from his colleagues, Greek finance minister Evangelos Venizelos seems keen to attend, though. ‘The country’s financial survival in the years ahead depends on this programme,’ he said today. ‘I hope a positive decision will be taken.’ Well, quite.

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