Third Bailout Has to be Negotiated Without Reigniting Turmoil
After two bailouts, Greece needs yet more money. While that is hardly surprising, the debate over how it should get it has the potential to ignite tumult in the seemingly calm euro zone.
Three problems are set to dog officials over the next few months. Greece has a shortfall of cash for the immediate future. Beyond that, it will need more aid to sustain itself through to 2016. And its debt remains too high.
Athens has to plug a roughly €4 billion ($5.3 billion) gap in its finances this year and next, as disappointing tax and privatization revenues have burned holes in its budget plans.
It will need to find yet more money—starting later next year—because of a worse-than-expected recession, poor prospects of returning to private markets as originally foreseen, and an unexpected debt-repayment bill to euro-zone central banks.
The International Monetary Fund, which cofinances Greece's bailout alongside euro-zone governments, can only continue to lend to a government if it is "fully funded" for another 12 months. As of this month, the IMF says, Greece isn't.
Three European officials said the problem will be dealt with in November, following a report from experts due to visit Athens in September.
The first upset could come in Athens. Greek officials are terrified that filling the immediate shortfall will require additional austerity measures in October.
That would test the resilience of a government weakened over the summer by the departure of a junior coalition partner, following a dispute over the closure of the national broadcaster.
The now two-party, conservative-led government has an uncomfortably razor-thin majority of five seats in the 300-seat Parliament.
"The request of additional austerity could well prove to be the straw the breaks this government's back," Mujtaba Rahman, head of European analysis at Eurasia Group, said.
Tapping an €8 billion stash of cash in Greece's bank-recapitalization fund could help, a senior official at the Greek finance ministry suggests.
But that money could well be needed for future capital injections, possibly early in the new year, a senior euro-zone official said.
The euro-zone official explained that the European part of Greece's bailout, due to run out in December 2014, will in fact suffice only until next August. A new aid package would be needed to support Greece from the autumn of 2014 until the end of 2016, he said. The IMF's program extends until early 2016.
So German Finance Minister Wolfgang Schäuble told it like it is to his electorate last week: Greece will need a third bailout.
Emboldened, his Greek counterpart, Yiannis Stournaras, rushed to explain it would "only" be €10 billion and would come with no new austerity demands.
But officials in Brussels warn that there will be no free lunch for Greece. "There is zero chance Greece will get more money without conditions," the euro-zone official said.
The amount of new loans is likely to be between €10 billion and €15 billion, several European officials with knowledge of the country's finances and the creditors' intentions said. The IMF in its latest review in July estimated Greece's additional needs at €11 billion.
To a large extent, Greece needs a third bailout to repay the first two. This year, it started paying back its IMF loans. A cool €20.3 billion must be repaid to the Washington-based institution between 2014 and 2016.
On top of that, euro-zone central banks holding Greek government bonds are demanding that they be repaid at maturity, instead of allowing them to be rolled over, as had been expected. Athens now will need €5.6 billion by 2016 to pay them off.
All this will be on the agenda in November, the euro-zone official said.
Then, there is the IMF's long-standing demand that euro-zone governments forgive some of Greece's debt (while also insisting that Greece repay the billions borrowed from the fund—in full and on time.)
This discussion seems set to take place after April. That is when Eurostat, the European Union statistical service, officially declares what the country's debt was in 2013.
The IMF extracted a commitment from euro-zone governments last November that, if Greece kept to the deal, they would take "additional measures" to cut its debt to "substantially below 110% of gross domestic product by 2022."
Unless Greece experiences a historically unprecedented and unlikely economic boom, that ratio can only be achieved if official creditors agree to take losses.
That, European officials say, is out of the question. Maturity extensions and a modest interest-rate cut is all that is on offer.
Greece can spell trouble for the Europe-IMF relationship, but the two sides seem to have agreed the choreography: deal with financing shortfalls in November; leave the debt-cut talks for next year.
An omertà has been agreed between Washington and Berlin, one senior EU official said, citing conversations with IMF colleagues: "You [Germany] make no trouble with the financing and we make no trouble with the [demand for debt cuts] right now."
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