German-IMF Rift Stalls Greece Deal

Πηγή: WSJ
By STEPHEN FIDLER
Feb 2 2012

BRUSSELS—A long-awaited agreement to restructure more than €200 billion ($262 billion) of Greek government bonds in private hands is being held up in large part by big differences between two of Greece's official creditors: the International Monetary Fund and Germany.

Several people close to the negotiations say a deal between Greece and private bondholders could be concluded in hours, as only small differences remain between the two sides. But the rift between the IMF and Germany—on top of a desire among all official creditors to secure a solid commitment from Greek politicians across the political spectrum to big changes in the economy's structure—has delayed final completion of the accord.

The gap between Germany and the IMF, central players in the decision on a new bailout for Greece, reveals a fundamental divergence in their approach to reducing Greece's huge debt burden.

The IMF has argued, increasingly vociferously, that cutting the face value of the €200 billion of Greece's debt in private hands won't be enough to reduce the government's debt to the official target of 120% of gross domestic product by 2020—a goal many analysts consider not ambitious enough.

The fund says a credible deal will also require sacrifices from Greece's official creditors in Europe—the European Central Bank and national governments. In a sign of how the issue has moved onto the agenda, it has spawned an acronym: OSI. That stands for "official-sector involvement" and is a parallel to PSI—private-sector involvement, the euphemism for pushing private investors to take losses.

Germany sees the problem differently. It is adamant there should be no official-sector involvement, and it opposes filling a growing gap in Greek finances by making more loans from governments. With its parliament already chafing at German-financed transfers to Greece, Germany wants that gap to be filled by deeper cuts in the Greek budget.

The IMF argues further draconian budget cuts aren't achievable and will make Greece's economic program more likely to veer further off track. It is shifting its main focus away from the budget andtoward making sure structural changes, such as an overhaul of Greece's labor market, are put in place.

"Germany feels it is being cornered by the IMF," says Mujtaba Rahman, a former European Union official who is now an analyst with the Eurasia Group in New York. "The IMF is insisting on OSI, on a larger than currently envisioned amount of funding for the new program and a relaxation of Greece's deficit targets. Germany, however, has the opposite position: no OSI, conservative amounts for the new program and strict deficit targets."

This is the context, analysts say, for the proposal from Germany's finance ministry that emerged last week for Greece's budget to be managed in future partly from Brussels. That proposal got an angry response from Greece and received little support at an EU summit Monday.

Euro-zone officials said official sector involvement is now under active consideration. There are several ways this can be achieved—and the IMF has said it has no preference for how it is done.

The most obvious—and controversial—is for the ECB to make concessions over the estimated €40 billion in Greek bonds it holds because of buys it made seeking to calm Europe's sovereign-bond markets.

The ECB declined to comment.

The bank has resisted participating in the deal being worked out with private bondholders, which would force it to take losses. That is regarded by many governments as a step too far, not least because it would provide a disincentive for such market purchases in the future, for countries such as Portugal, Spain and Italy.

MarketWatch.com columnist Brett Arends has many questions regarding Europe's economic crisis and visits Mean Street to try to unravel the mystery.

However, as one senior official said this week, the ECB could contribute not by taking a loss—but by "forgoing profits." That would mean devising a mechanism to take the bonds off the ECB's balance sheet at the prices at which it bought them. Given estimated purchase prices of 70%-75% of face value, the ECB's participation could generate a further €10 billion of debt reduction for Greece to add to €100 billion from the restructuring of private debt.

Another option being discussed is for an estimated €12 billion of bonds being held by central banks around the euro zone in investment portfolios to be tendered in the private deal. This would leave the secondary market purchases intact—and cut Greece's debts by a further roughly €6 billion.

Another option under consideration, a euro-zone official said, would be for euro-zone governments to cut the interest rate on bilateral loans made to Greece. The governments have lent Greece €52.9 billion so far, and Greece is due a further €27.1 billion under the bailout agreed in May 2010. A cut of one percentage point on the loans could generate several billion euros in savings though 2020.

Time is short because Greece faces a €14.5 billion bond payment in late March unless it has restructured its debt by then. Officials hope a special meeting of euro-zone finance ministers will sign off on the deal as early as Monday in Brussels—but officials say that depends on Greek politicians making a credible commitment to do their part beforehand, something that can't be taken for granted.