GERMANY’S RETREAT over private sector participation in a second bailout for Greece clears the way for detailed talks on a new aid package for Athens.
Key hurdles remain, however, and the threat of a Greek default still looms.
Greek premier George Papandreou sought yesterday to calm an anti-austerity rebellion within his Pasok Socialist party by replacing finance minister George Papaconstantinou with former defence minister Evangelos Venizelos, one of his main rivals.
Whether this is enough to appease dissenters in Pasok will have a crucial bearing on the next act in the debt drama. Mr Papandreou faces a confidence motion on Tuesday. The vote follows his failed attempt to form a unity government with the country’s centre-right opposition, greatly increasing the stakes.
If Mr Papandreou survives, his prospects of securing parliamentary support for a draconian new fiscal plan will improve. If not, the proposal would be in grave doubt and so too would the release of a €12 billion EU-IMF loan next month.
Greece would default without this money. But its international lenders are adamant the funds will not be transferred without parliamentary approval for drastic new spending cuts and tax increases. These measures, agreed at the behest of the EU-IMF “troika”, have prompted huge protests in Athens and other Greek cities.
Euro-zone finance ministers gather tomorrow night in Luxembourg to reflect on this increasingly tense situation. They meet again on Monday to discuss governance reform and ongoing bank stress tests.
Although EU leaders take up the Greek problem again at a summit next Thursday and Friday, there is little prospect that the riddle will be settled at that time.
Still, the ministers are expected to endorse an ad hoc deal with the International Monetary Fund to ensure it provides its €3 billion share of the €12 billion loan next month. This assumes, however, that the Greek parliament backs the plan.
The fund’s contribution was in doubt due to uncertainty over Greece’s funding outlook into next year following the troika’s conclusion that the country will not be able to regain entry to private debt markets next year.
Under its own house rules, the fund cannot lend to a country whose medium-term financing is in question. This debate over a second Greek bailout has triggered a split between Germany and the European Central Bank over the principles of private creditor participation in a new rescue.
Having pushed for a “quantified” contribution from market investors, German chancellor Angela Merkel conceded yesterday that any move impose bailout costs on private creditors should be voluntary. This increases the prospect of a second Greek rescue, but raises questions over the effectiveness of any measures to include private creditors.
Investors will be asked to voluntarily maintain exposure to Greece as their debt matures. But it is easy to foresee that the doubts over the country’s solvency will encourage many of them not to comply.
