Greece on the edge

IMF faces clash with EU over debt-reduction target as finance chiefs meet to approve the latest bailout package for the troubled economy

PUBLISHED : Tuesday, 20 November, 2012, 12:00am
UPDATED : Tuesday, 20 November, 2012, 3:51am

European finance ministers aim to stitch together Greece's next aid payment this week as a sputtering euro-area economy and a dispute with the International Monetary Fund cloud efforts to resolve the debt crisis.

The finance chiefs are due to meet in Brussels today for the second time in a week after they agreed last week to keep Greece's bailout aid flowing.

In addition to a disagreement between the European Union and IMF over softening Greece's debt target, the ministers will attempt to re-engineer the current bailout without asking taxpayers to put up more money.

The talks are "likely to be tense as all players set out their positions", said Thomas Costerg, an economist at Standard Chartered in London. "Greece's debt can is likely to be kicked further down the road, but we could see some constructive statements."

The meeting of the ministers from the 17-member euro area underscores continuing skirmishes among EU officials confronting rising unemployment and a slowing economy as they struggle with the three-year-old debt crisis.

The finance chiefs' talks will precede a EU summit on Thursday and Friday to resolve the bloc's budget, a project threatened by a dispute with Britain.

With tens of thousands of Europeans staging protests last week against austerity measures and unemployment, shifting dynamics in other European countries could foreshadow renewed conflict - an early election in Italy, a regional vote in Spain and an approaching bailout for Cyprus.

Spanish bonds fell last week, pushing 10-year yields to the highest level in six weeks, as a report showed the euro-area's economy is in recession in the third quarter. The euro has fallen 1.7 per cent this month against the US dollar, slipping 0.3 per cent to US$1.2743 last Friday.

IMF director Christine Lagarde took issue with European governments' decision to push back Greece's debt-reduction target by two years to 2022 against the fund's recommendations, raising questions over whether the IMF would keep financing Greece.

Lagarde, who cut short a visit to Southeast Asia to return to Europe, signalled a potential clash in an interview in Manila on Saturday by saying she will defend the IMF's credibility.

Lagarde was approaching the talks feeling "patient and resilient". Even so, "we never leave the table," she said when asked about dropping support.

The IMF target is for a reduction of Greece's debt to 120 per cent of gross domestic product by 2020, from a projected peak of 190 per cent of GDP in 2014.

An agreement on what is sustainable debt in Greece is required to plug a finance gap of as much as €32.6 billion (HK$321.8 billion).

Greece would probably need another aid package after 2014, European Central Bank board member Joerg Asmussen said in Germany yesterday.

Although European leaders have pledged to do all they can to avert a Greek exit from the single currency, they have refused to return to parliaments for more funding.

Finnish Premier Jyrki Katainen, speaking on YLE Radio Suomi at the weekend, again rejected further funds for Greece.

German Finance Minister Wolfgang Schaeuble told reporters last week that the current package could be rejigged by cutting rates on loans or giving Greece extra time. On ARD television yesterday, he reiterated his rejection of a third option: write-offs of the country's debt held by public institutions.

Greece, which has undergone the biggest sovereign restructuring in history after private investors forgave more than €100 billion of debt in March, might need another write-off after the government enacted economic reforms, European Central Bank governing council member Jens Weidmann said last Friday.

Luxembourg Prime Minister Jean-Claude Juncker, who oversees the finance chief meetings of the euro nations, last week predicted a "definite decision" on releasing the next aid payment.

Juncker said the ministers might have to consult once more, possibly by teleconference, by the end of this month to formally sign off on the updated rescue package.

"We have to find a common line and we have to do it on Tuesday," Schaeuble said on ARD. "We're working at full steam. I think we'll do it."

In Italy, supporters of Prime Minister Mario Monti inaugurated a new political party at the weekend to push for a continuation of the premier's policies, which have included tax increases and spending cuts. That comes after Italian President Giorgio Napolitano said the national vote could be moved up if parliament completes its agenda by passing a budget plan and new election rules.