Greece is to get a vital slice of aid next month to avoid default, international lenders said on Friday, while the EU raised the prospect of expanding the bailout of the eurozone state.
The European Commission, the European Central Bank (ECB) and the IMF, ending a month-long review of their 110 billion euro (US$160 billion) bailout program, said Athens had made considerable progress toward repairing its finances, but must step up fiscal and economic reforms.
“Once this process is concluded and following approval by the IMF’s Executive Board and the Eurogroup, the next tranche will become available, most likely, in early July,” they said.
Greek Finance Minister George Papaconstantinou has said Athens will be unable to meet its obligations from the middle of next month if it does not get the next 12 billion euro tranche of its bailout loan. The money was originally due for release on June 29.
Separately, the chairman of eurozone finance ministers held out the prospect of additional aid for Greece beyond the original bailout, which was agreed in May last year.
“I expect the Eurogroup to agree to additional finance being provided to Greece under strict conditionality,” Luxembourg Prime Minister Jean-Claude Juncker said after talks with Greek Prime Minister George Papandreou in Luxembourg.
The new plan will for the first time include involvement of private sector investors in helping Greece on a voluntary basis, Juncker said.
He did not elaborate and sources close to the talks said the way in which private investors would be involved was still being debated by EU and ECB officials. Some form of debt rollover, in which investors would maintain their exposure through purchases of Greek bonds when existing ones mature, appears the most likely outcome.
Greek newspaper Kathimerini said a new three-year bailout package for Greece, to run until mid-2014, would total 85 billion euros, of which the EU and the IMF would provide less than half. The rest of the money would come from sales of Greek state assets and a private sector debt rollover, it said.
Papandreou presented to Juncker a medium-term budget plan featuring deeper spending cuts, measures to boost revenues and a faster sell-off of state assets, to be managed by an independent privatization agency.
EU Monetary Affairs Commissioner Olli Rehn said Greece’s latest fiscal commitments were “essential” to restoring the sustainability of its finances, and could lead to additional aid.
Athens has veered off course in its current bailout program because of a revenue shortfall due to a deep recession and chronic tax evasion, requiring extra steps worth 6.4 billion euros or 2.8 percent of GDP this year.
The Greek finance ministry said the government would finalize new fiscal measures in the coming days, putting them to parliament after the Cabinet approves them.
The new steps face rising opposition from trade unions and youth protesters, as well as from some back-bench members of Papandreou’s governing PASOK socialist party.
Increased European funding for Greece could face resistance in the parliaments of fiscally conservative northern states, especially Germany and the Netherlands.
Taxpayers in donor countries have so far borne the burden of rescuing Greece and fellow eurozone members Ireland and Portugal.
Some European politicians and economists argue that investors in Greek government bonds must do more than simply accept a rollover. Claudio Loser, a former director of the Western Hemisphere for the IMF, said the fund should push harder for Greece to restructure its debt and negotiate “haircuts,” or reductions in the value of bonds, with investors.
However, the ECB has fought that idea, fearing it would trigger a violent chain reaction in financial markets far beyond Greek borders and provoke a crisis among European banks which hold a large amount of Greek debt.
However, most market economists polled by Reuters believe Greece’s 340 billion euro debt mountain is unsustainable and will have to be restructured sooner or later. Without a restructuring an expanded bailout of Athens may simply buy time without solving Greece’s underlying problem.
“I think [official lenders] have a plan in their head that is reasonable for kicking the can down the road another three months,” said Gianluca Salford, European fixed income strategist at JPMorgan.
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