Friday, February 20, 2015

Greece Offered Four-Month Lending Deal, Contingent On Structural Reform

From the land of quality chocolate … emerged a classic European fudge.

Greece came to a deal – of sorts – with its European creditors on Friday evening. In a clear acknowledgement of the dire state of Greek finances, the European Central Bank, the European Commission and the International Monetary Fund agreed to throw the indebted nation financial life line for four months.

“We have established common ground to reach agreements,” said Jeroen Dijsselboem, leader of the Eurogroup – the collection of euro zone finance ministers.

However, funding is dependent on the Greek government committing to a programme of “broader structural reforms,” including implementation of budget cuts agreed by its predecessor.

Offering the smallest of concessions to the Greek government, elected in January on promises to roll back cripping austerity measures, Dijsselbloem acknowledged some “flexibility” in the current agreement, which expires on February 28. “We will make the best of that,” he added.

Dijsselbloem also implied that lenders may consider a reduction in the budget targets of the current bailout, which envisions Greece achieving a primary surplus of 4.5% by the end of 2016, far higher than the euro zone average.

The Greek government is required to submit its structural reform programme by “the close of business on Monday,” said Christine Lagarde, IMF managing director. The troika of international lenders will begin evaluating the Greek measures on Tuesday, with an eye to agreeing terms by the end of April.  However, the authorities would “strongly prefer that [agreement] would be quicker,” said Dijsselbloem.

Crucially, no new funds will be disbursed until the two sides reach agreement on structural reforms, which presents Greek Prime Minister Alexis Tsipras with a headache. He has already introduced legislation to halt privatisations and to reverse labour market reform, by lifting the minimum wage and restoring some pension disbursements, cancelled by the previous government as the price of the current bailout.

The new prime minister has enjoyed approval ratings as high at 75%, but it will be difficult for him to present the outcome of the negotiations in Brussels in a positive light. His left-wing Syriza party includes a band of hard-leftist politicians, who have been vehemently opposed to offering any concessions to the troika.

Greek Finance Minister Yanis Varoufakis was combative following the conclusion of negotiations, lamenting the challenge of implementing measures “when you don’t have a moral right … a mandate to say yes.”

The Syriza party failed to win a majority in the January election, and depends on the support of a far-right party in parliament. No coalition government has survived for more than two and a half years in Greece, while the average tenure is even shorter than that.

The promise of extended funding may stem the flow of cash from Greek banks, giving Greece a bit of breathing space. But relations between Greece and its lenders are far from harmonious — Dijsselbloem made several mentions of the need to “rebuild trust.” Until both sides sign on the dotted line, Greece’s future in the euro zone is far from certain.

Greece Deal Reached

by Karl Stagno Navarra and Jonathan Stearns
12:56 PM EST
February 20, 2015
What Greece Is Getting Out of EU Agreement

(Bloomberg) -- Euro-area finance ministers reached an accord that would keep bailout funds flowing to Greece in return for a commitment to meet certain conditions, buying time to work out the detail of longer-term Greek financing.

Talks in Brussels between officials from the 19 euro-area finance officials concluded Friday evening with an agreement to extend aid to Greece for four months.

“We agreed on four months under conditions,” Austrian Finance Minister Hans Joerg Schelling told reporters after the meeting. Greece must submit a list on Monday of measures it will undertake in return and “the institutions check whether the list is sufficient,” he said.

Breakthrough in the standoff between Greece and its creditors eases the immediate risk of Prime Minister Alexis Tsipras’s government running out of cash as early as next month. It might also go some way to help repair the ties between Greece and Germany, the biggest European contributor to Greece’s 240 billion-euro ($274 billion) twin bailouts and the chief proponent of economic reforms in return.

U.S. stocks rose and the euro advanced with European equity futures amid optimism over the prospects for an accord.

To contact the reporters on this story: Karl Stagno Navarra in Brussels at; Jonathan Stearns in Brussels at
To contact the editors responsible for this story: Alan Crawford at James Hertling

Greece Can Pay Its Debts in Full, but It Won’t

The signs for Greece’s creditors aren’t propitious

Greece and its eurozone creditors are poised for another round of tough negotiations over extending its bailout program, after Germany summarily rejected a request for an extension sent by Athens.

Feb. 19, 2015 6:59 p.m. ET

The Greece crisis is reinforcing a cardinal rule of sovereign-debt crises: It isn’t whether a government can pay what it owes, it’s whether it wants to.


The new left-wing government in Greece is seeking to reduce debts it says it can’t pay; its finance minister, Yanis Varoufakis, has called his own country bankrupt and insolvent. It has initiated negotiations—which continue in Brussels on Friday—with other eurozone governments to reduce the burden its debt represents.

Tensions were high ahead of the Brussels meeting. German and Greek officials traded barbs throughout the day Thursday after Berlin flatly dismissed Athens’s request to extend its bailout program.

Both capitals appeared to be staking out their positions ahead of the talks, underscoring how ties between the two have frayed since Greece’s left-wing Syriza party, led by Prime Minister Alexis Tsipras, swept to power last month on its promise to scrap the unpopular bailout.

Nobody is claiming—as they might of a bankrupt company—that Greece doesn’t have the wherewithal to pay back all its €320 billion-plus ($365 billion) of foreign debt in full: The assets of the country dwarf that figure.

What is in question is whether the Greek government can levy taxes or charges on its people—or can sell assets—sufficient to service its debts and still do all the other things Greeks expect it to do.

Sovereign bankruptcies are different animals from corporate bankruptcies, said Carmen Reinhart and Kenneth Rogoff in their 2009 book “This Time It’s Different.” Lenders simply don’t have the same enforceable rights to seize assets from governments as they do with companies and individuals.

However, “in most instances, with enough pain and suffering, a determined debtor country can usually repay foreign creditors,” they said.

The authors cite the example of Romanian dictator Nicolae Ceausescu, who forced Romanians to shiver through freezing winters with little or no heat and made factories close through want of electricity so he could repay the $9 billion his government owed to foreign banks.

Ultimately, that didn’t work out too well for the Romanian leader, who was executed by firing squad in 1989 after a show trial. For other leaders, the penalties may not be so savage. But political careers and sometimes a country’s political stability depend on the outcomes.

One reason that Germany—now Greece’s largest creditor—and other members of the eurozone are angry over Mr. Tsipras’s aggressive drive to secure more relief is that they believe Greece can repay its debts.

Athens argues that its debt-servicing schedule will force it to run a so-called primary surplus—a budget surplus before interest payments—equivalent to 4.5% of gross domestic product next year and for the indefinite future. That, it says, is just not politically sustainable.

Nonsense, say its creditors; such budget performances aren’t unusual.

In its June 2011 monthly bulletin, the European Central Bank cited four other eurozone countries that did just that or more in recent history: Belgium (1993-2004), Italy (1995-2000), Ireland (1988-2000) and Finland (1998-2003). Even Greece managed it from 1994 to 1999.

In just about all of these cases, countries were pushing debt down to prepare for their entrance into the European Monetary Union.

“If the country was willing to accept these surpluses when preparing for EMU, one should be able to assume that the same policy should be acceptable as the price of staying in the euro,” argues Daniel Gros, director of the Brussels-based Centre for European Policy Studies.

Also, creditors say that Greece’s debt-servicing burden isn’t excessive, thanks to the concessions its government creditors already made to lower interest rates and extend loan maturities.

According to data from the Greek government, interest payments fell from 7.3% in 2011 to about 4.2% of GDP last year. Thanks to an interest-rate holiday granted by the creditors until 2022, Greece has to find less in cash: A government estimate from last year suggested the expected interest bill in cash would fall to just 2.2% of GDP in 2020.

That isn’t high when compared with some other countries.

In 2013, the Portuguese government paid 5% of GDP in interest, Italy paid 4.8% and Ireland 4.4%.

This benign assessment, however, ignores some difficulties. Some years will be more problematic: In 2015 and 2019 the debt-repayment bill will be high, and in 2022 all the forgone interest from the previous 10 years comes due.

Furthermore, the budget surpluses of the 1990s were generated with what was then seen as the optimistic prospect of joining the euro, rather than the unappetizing prospect after a long and very deep recession of making sure foreign creditors are happy.

And that last factor is also relevant. A significant proportion of the debt of most European governments is held by their own citizens. If Italy or Belgium suspend payments on their debts, their own citizens will suffer. There is thus a domestic constituency arguing for government debt to be paid.

For Greece, that isn’t the case. The vast majority of its debts are held by foreign governments, which don’t get to vote in Greek elections.

Mr. Rogoff cites the following rule of thumb: It is politically difficult for any government to sustain over a long period debt-servicing payments to foreigners of more than about 2% of GDP.

As for almost all sovereign debtors, then, it’s about the Greek government’s willingness to pay the political price needed to service its debts in full.

In that respect, the signs for Greece’s creditors aren’t propitious.

The question becomes not really whether they will be repaid in full, but how they won’t be: whether it will be through negotiation, or whether this or a future government will take matters into its own hands.

Write to Stephen Fidler at

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