Bloomberg News

Euro-Area Finance Chiefs Approve Sixth Aid Payment to Greece

October 21, 2011

(Updates with Greek finance minister’s comments starting in sixth paragraph. For more on Europe’s debt crisis, see EXT4.)

Oct. 21 (Bloomberg) -- Euro-area finance ministers signed off on a 5.8 billion-euro ($8.1 billion) loan to Greece under last year’s bailout as European leaders reopened talks on a new aid package that will involve writedowns on Greek debt.

The green light for the sixth disbursement of funds under the fully taxpayer-funded package of 110 billion euros shifted the spotlight to the role of bondholders in a bigger second rescue for Greece.

The euro area wants investors to contribute more than the 21 percent writedown on debt they agreed to in July, when leaders approved the new 159 billion-euro package. That was to include 50 billion euros from bondholders.

“We have agreed to endorse the disbursement of the next tranche of financial assistance to Greece in the context of the current economic adjustment program,” the 17 euro-area finance ministers said in a joint statement today in Brussels. “To ensure debt sustainability, we will conclude a second economic adjustment program for Greece, with an appropriate combination of additional new official financing and private-sector involvement.”

Greek Prime Minister George Papandreou won a parliamentary vote for new pension and wage cuts and tax increases yesterday in Athens to close a budget gap and secure the loan. He got backing for the bill as European leaders, already due to meet on Oct. 23, announced a second summit for Oct. 26 to give them more time to work on a strategy to combat the Greece-triggered debt crisis that continues to roil global markets.

‘Positive Step’

Greek Finance Minister Evangelos Venizelos said the euro area’s approval of the next disbursement of funds was a “positive step” that justified budget cuts needed for the money and would lead to better aid terms in a new financing package.

“The sacrifices of the Greek people and the implementation of tough, but nationally imperative, rescue measures are the basis not only of the sixth tranche but also of the new program that secures the long-term sustainability of Greek public debt,” Venizelos said in an e-mailed statement.

Greece has said it has the cash to operate until mid- November after a scheduled review of the country’s progress in meeting fiscal targets was suspended for about two weeks last month.

IMF Loan

The International Monetary Fund, which is funding almost a third of last year’s package for Greece, is expected to discuss approval of its next loan of 2.2 billion euros to the country after euro-area leaders rework the July 21 agreement. IMF Managing Director Christine Lagarde, a former French finance minister, took part in today’s meeting in Brussels.

The next euro-area aid disbursement “is expected to take place in the first half of November, pending the approval by the board of the International Monetary Fund,” the finance chiefs said in their statement.

The calls for bigger bondholder losses in the planned second aid package come amid indications that Greece’s debt isn’t sustainable as the economy shrinks faster than forecast.

Inspectors from the European Commission, European Central Bank and IMF said in a report that the financial situation in Greece “has taken a turn for the worse” since their last review in June. “Large, long-term, and sufficiently generous official support will be necessary for Greece to remain current on its debt service payments and to facilitate a declining debt trajectory.”

Market Access

Greece’s debt load stood at 144.9 percent of gross domestic product at the end of 2010. Giving scenarios using discount bonds with an assumed yield of 6 percent and no collateral, Greek debt can be brought to just above 120 percent of gross domestic product by the end of 2020 if 50 percent discounts are applied, the inspectors said.

“Given still-delayed market access, large scale additional official financing requirements would remain, estimated at some 114 billion euros,” the inspectors said. “To get the debt down further would require a larger private-sector contribution” of at least 60 percent to reduce debt below 110 percent of GDP by 2020.

The euro-area finance ministers drew attention to these issues in their statement, saying “the macroeconomic situation has deteriorated” and “economic challenges remain large.”

Papandreou has said that securing approval for the austerity bill would give him a negotiating edge this weekend in talks on the second financing package for Greece. He expelled one lawmaker for voting against one of the articles in the legislation, whittling down his four-seat majority.

The initial bailout of Greece was made up of loans from euro-area governments and the IMF. The euro area’s share of the new package is set to come from the European Financial Stability Facility, which is already contributing to international rescues of Ireland and Portugal.

--With assistance from Stephanie Bodoni in Brussels. Editors: Patrick G. Henry, James Hertling

To contact the reporters on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net; Maria Petrakis in Athens at mpetrakis@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net


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