Wiggle Room Emerges in Greece’s Bailout Deal

Wiggle Room Emerges in Greece’s Bailout Deal

By JAMES KANTER and PAUL GEITNER
Published: June 19, 2012
BRUSSELS — As Greece’s political parties maneuvered to form a new government Tuesday, the country’s creditors were signaling a willingness to discuss revised terms for Greece’s bailout package to reflect its rapidly deteriorating economy.
The newfound willingness to talk, while probably requiring Greece to stick to long-range targets for reducing its debt and making structural changes in its economy, follows the elections Sunday in which the center-right party New Democracy, led by Antonis Samaras, won a narrow victory over the hard-left Syriza party. Syriza had demanded a complete renegotiation of the bailout deal Greece struck this year with a trio of international institutions.

The prospect that Mr. Samaras would lead the new government brought a sigh of relief in Brussels, as he had pledged to stick in principle to the bailout deal, averting an imminent and messy Greek exit from the euro zone. But Mr. Samaras has also made it clear that he will seek some concessions on the terms of the €130 billion, or $165 billion, rescue his country secured in March from the so-called troika of the European Union, the European Central Bank and the International Monetary Fund.


Discussions were expected to begin Thursday night in Luxembourg at a meeting of finance ministers from the euro zone nations, though it was not clear whom Greece would send. Also scheduled to attend are Mario Draghi, the president of the E.C.B., and Christine Lagarde, the managing director of the I.M.F.

Officials say they will not know how far off track the Greeks are from meeting the conditions for continuing to receive bailout payments until its new government is in place and a team of inspectors can return to the country.

But given the economic downturn across the euro zone and the political stalemate in Athens since May, one euro zone official said Tuesday that it was “quite logical” that Greece’s early targets had been missed. The memorandum signed by Greece and its creditors must be “changeable” to reflect evolving conditions, “otherwise it would be stupid,” said the official, who spoke on condition of anonymity ahead of the private talks.

Conny Lotze, an I.M.F. spokeswoman, said such adjustments were not unusual for countries that had received financial bailouts. “These economic programs are not static,” she said. “They do get adjusted.”

The lengthy agenda of the Luxembourg meeting will also include an update on the precarious condition of Spanish banks, an I.M.F. economic review of the euro area and a report on the situation in Cyprus, which may have to seek its own European bailout agreement if it cannot secure a rescue loan from Russia.

The European official who discussed the possibility of revising Greece’s bailout terms indicated that flexibility could be shown in how the country used new taxes or in the additional spending cuts that might be required to bring the country’s debt down to a sustainable level by 2020.

By last month, for example, the government in Athens was supposed to have identified €11.7 billion in preliminary additional savings to meet budget targets for 2013 and 2014. Mainly because of the political turmoil, that has yet to be done.

The cuts, to be adopted over the next two years, were to have focused mainly on social, health care and military spending as well as reductions of government payrolls. But the euro zone official said that rethinking those cut would probably be one subject of talks over the summer.

With Mr. Draghi and Ms. Lagarde — frequent critics of inaction by euro zone governments — both present in Luxembourg, there could be spirited debate over the conditions and timetables set for Greece on making economic reforms, which are to include opening up closed professions, improving tax collection and selling state-owned assets.

Germany has continued to show little enthusiasm for granting Greece flexibility on the main terms of its bailout agreement. At a news conference Tuesday at the Group of 20 meeting in Mexico, the German chancellor, Angela Merkel, said she had spoken with Ms. Lagarde on Monday and urged her to move quickly once a Greek government was formed.

“It’s very clear that the reforms that were agreed to in the past are the right steps and that they therefore also have to be implemented,” Ms. Merkel said. “Now I’m waiting for the troika’s report.”

Amadeu Altafaj, a spokesman for the European Commission, insisted Tuesday that the memorandum covering the Greek bailout agreement would not be rewritten. But he also indicated some flexibility might be possible once a new government was formed and the lenders’ inspectors could return to the country.

“I’m sure the troika will be keen to go to Athens and map out the situation,” Mr. Altafaj said, “to discuss with the Greek authorities what the best means of implementing the program agreed upon by the Greek government with its partners is going to be.”

One possible source of tension within the euro group could be if Greece were given deadline extensions, which would result in the country needing more money to finance a longer payback schedule for its loans.

In a report Monday, Mujtaba Rahman, an analyst at the Eurasia Group, estimated the additional financing gap to be €20 billion to €30 billion.

A request for more money for Greece would almost certainly go down badly not only in Germany but also in other Northern European countries like Finland and especially the Netherlands, where anti-European parties on the far left and far right have been gaining support ahead of a general election in September.

The political sensitivities could mean that any revised agreement would be put off until a new Dutch government is formed, dragging out the uncertainty.

Ministers also are expected to review the results of two independent audits to be released Thursday on the health of Spanish banks, reports that the government in Madrid has said it will use to determine the exact amount of assistance to request. On June 9, the Eurogroup of finance ministers agreed to make up to €100 billion available to Madrid to recapitalize its struggling banks.

The announcement that European money was on call for Spanish banks, though, has done little to improve market sentiment toward Spain, in large part because the loans would only add to the debt burden of the cash-strapped Spanish government.

European officials insist, however, that a direct injection of capital into the banks themselves is impossible under current rules. In theory, the board of the new bailout fund, the European Stability Mechanism, could change those rules. But that fund is not expected to open for business until July 9 at the earliest, because the treaty establishing it has not yet been fully ratified.

Meanwhile, Cyprus faces a June 30 regulatory deadline to find €1.8 billion to recapitalize its second-largest bank, Cyprus Popular Bank, which was hurt by its exposure to Greek debt. The country has been discussing a loan from Russia or tapping E.U. rescue funds, and the Cypriot finance minister, Vassos Shiarly, said Tuesday that he was optimistic financing would be found in time.

Italy, which is combating the cost of paying the rising returns that investors demand to hold its debt rather than benchmark German bonds, could also be in focus at the ministers’ meeting this week.

But there is unlikely to be any enthusiasm for an Italian suggestion: To establish a semi-automatic way for the E.C.B. or the E.S.M. bailout fund to intervene in the bond market when the interest rate spreads of euro zone bonds rise by a specified amount over benchmark German bonds, which tend to carry the region’s lowest rates.