Greece's international lenders agreed on Monday (12 November) to give the country two more years to meet its debt-reduction targets, leaving a funding hole of €32.6 billion in the country's finances up to 2016. A further meeting on 20 November will decide on how to fill that gap.
Eurozone finance ministers gathered in Brussels agreed to give Athens more time to meet its debt reduction goals, in 2016 instead of 2014.
"The Eurogroup concludes that the revised fiscal targets…would be an appropriate adjustment," Jean-Claude Juncker, the chairman of eurozone finance ministers, told a news conference after nearly six hours of talks (>> read Eurogroup statement on Greece)
Juncker said a further Eurogroup meeting would take place on Nov. 20 to decide on how to fill the funding gap. Officials said more negotiations could be required the week after that to nail down a new deal.
"We know that Greece has asked for a bit more time, but more time means more money," said Austrian finance minister Maria Fekter before entering the meeting yesterday.
"That's an issue because where should that money come from?"
"We have to be more creative," Fekter added, saying the ministers cannot go back to their parliaments every three months to ask for more taxpayers money.
Loans to Greece held up
However, the ministers refused to disburse more aid to the debt-ridden country, pointing to a debt analysis that was still underway.
Despite Greece approving a tough 2013 budget last week, which it hoped would meet conditions for the release of a tranche of €31.5 billion of emergency loans under its second bailout programme, its lenders still need to agree on how to make its debts sustainable into the next decade.
International Monetary Fund chief Christine Lagarde said more work was needed to cement the budget measures.
"That … (budget law) clearly needs to be reviewed a little bit, to make sure that all prior actions contained in that budget law are actually taken," she told the same news conference. "There will be a few, only a few additional prior actions to be verified in the coming days."
A compliance report by the European Commission, the IMF and the European Central Bank, together known as troika, calculated that giving Greece two more years to meet its immediate debt-cutting targets would leave a funding hole of €32.6 billion to be filled up to 2016.
Discussion on how to close that gap will be high on the ministers' agenda when they next meet.
Target moved to 2016
A target was set in March for Greece to achieve a primary surplus of 4.5% of GDP in 2014. That will now be moved to 2016.
Lagarde also said the IMF did not agree with Juncker, who said a target to reduce Greece's debts to 120% of GDP by 2020, from around 190% next year, should similarly be shifted back by two years.
"In our view the appropriate timetable is 120% by 2020," Lagarde said. "We clearly have different views. What matters at the end of the day is the sustainability of Greek debt so that country can be back on its feet."
The IMF has set 120% as the target, saying that anything much above that will not be sustainable given Greece's low growth prospects and high external borrowing requirements.
Greece's lenders will not release more money until a "debt sustainability analysis" from the troika, has spelled out how to reach that goal. That analysis is expected to be discussed in more detail at the meeting on Nov. 20.
Loans have been held up since Athens, which has received two bailout packages from the eurozone and IMF, went off-track with promised reforms and budget cuts, partly as a result of holding two elections in the space of three months earlier this year.
The IMF has been pushing for governments to write off some of their official loans to Greece, but Germany, the European Commission and others have said it is not legally possible.
"All avenues in order to reduce debt on Greece are being explored and will continue to be explored in the coming days," Lagarde said.
Three officials told Reuters that the troika had concluded that Greece's debt burden will fall only to 144% of gross domestic product in 2020 and roughly 10 percentage points lower two years later if current policies do not change.
Once there is an agreement on Greece's debt path and how to bring it down, it will be sent to national parliaments to get approval for the disbursement of the next aid tranche – money Athens needs urgently to pay off loans and shore up its banks.
In the meantime, Greece will be allowed to issue more short-term paper to keep itself afloat.
Among the new instruments under consideration to reduce Greek debt are the removal of the 150-basis-point interest above financing costs on €53 billion of bilateral government loans to Greece, and lengthening the maturity of the loans.
Greece may also borrow from the eurozone bailout fund to buy back its privately held debt, of which there is €50-60 billion, taking advantage of the deep discount it trades at to save money on redemptions and interest payments.
Athens has to redeem €5 billion worth of treasury bills on Nov. 16 and has been counting on cash from the next eurozone aid tranche to help cover that. Since the money will not come in time, Greece wants to roll over the bills.
"I won't tell you how, but there won't be any problem on Nov. 16," Juncker said.
EU lending to Greece was held up in June after Athens went way off track with reforms and fiscal consolidation that it promised in exchange for a eurozone-funded bailout.
Representatives of the European Commission, the European Central Bank and the International Monetary Fund are in talks with the Greek government on reforms that Athens, cut off from market borrowing in 2010, has to implement to get emergency credit from the eurozone and IMF flowing again.
The three institutions, called the Troika, are also to prepare a report on Greek debt sustainability and ponder ways of finding additional financing if Greece were to reach a primary surplus of 4.5% of GDP in 2016 rather than 2014.
A Troika estimate presented to junior eurozone finance ministers in October showed that Greece would need an extra €30 billion to be financed over the two extra years.
- 20 Nov. 2012: EU finance ministers meet over Greece's debt reduction programme.