German objections to suffering losses on official loans to Greece have forced the eurozone to explore more complex means of helping Athens cope with its debt mountain.
After almost 10 hours of intense talks on Tuesday night, eurozone finance ministers failed to agree on how fast to cut Greece's debt pile. They called a further meeting next week to settle differences and release 44 billion euros of long overdue aid.
The main stumbling block was Berlin's refusal to back "illegal" cuts to the interest rates on bilateral loans to Greece or return the profits from the European Central Bank's purchases of Greek bonds, said people involved in the talks.
An alternative proposal involves offering 10 billion euros of extra loans to Athens from the European Financial Stability Fund, the eurozone's temporary bailout pot. The option is seen as a leading contender for a compromise deal.
This extra lending would support a more ambitious scheme to purchase Greek bonds held by private investors, part of a package of debt relief measures geared to bring down Athens' debt to significantly below 120% of economic output by 2022.
Sanctioning a new 10 billion euro bailout loan would pose a considerable political challenge to several countries and require the backing of restless parliaments in Germany, Finland and the Netherlands. In part to address the inevitable political concerns, officials are drawing up options to back the new loans with collateral from Greece's privatization program, which aims to raise 50 billion euros.
Berlin's demand that any new measures must not represent a fiscal transfer to Greece - which the German government sees as illegal - means that the degree of support given will vary country by country.
Wolfgang Schäuble, Germany's finance minister, said in Berlin he backed Greece's deploying 10 billion euros for a debt buyback and said "good progress" was made in Brussels on Tuesday. Pierre Moscovici, French finance minister, told French radio that the bloc was only a "whisker away from a deal".
France's President François Hollande, anxious to reach a deal on Greece to dispel "doubts about the integrity of the eurozone", clearly signaled continued differences between Paris and Berlin, saying there would be no accord "unless France and Germany reach agreement". He added: "Everyone has their domestic political issues. I respect that, but there is a higher interest."
Greece's debt burden has ballooned since the last bailout deal in March because the country's recession has been deeper than expected and because privatization plans have failed to get off the ground.
Greek debt is expected to peak at 190% of GDP by 2014; without any debt relief it would stand at 144% in 2020 and 133% in 2022. These levels are well in excess of the 120% benchmark for debt sustainability previously used by the International Monetary Fund.
Before the meeting of ministers on Tuesday, officials had drawn up a menu of measures to slash the debt mountain to 121% by 2020 and 107% by 2022, according to people familiar with the proposal. The measures - which officials initially believed had the backing of Berlin - included cutting interest rates on bilateral loans from 150 basis points above interbank rates to just 25bp.
But during the meeting, Mr Schäuble made clear those rates would amount to an "illegal" fiscal transfer because the rates were below the borrowing costs of the Germany's KfW development bank, which issued the loans. According to one person familiar with the proceedings, Mr Schäuble also said that, because the Bundesbank retained half the profits from its Greek debt holdings, it would be impossible for Germany to pass on all the upside to Greece.
Via - CNBC
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