Europe and the International Monetary Fund struck a deal early this morning to settle a damaging schism over the next phase of the Greek bailout.
The agreement came shortly before 1am in Brussels, after 12 hours of talks between euro zone finance ministers and IMF chief Christine Lagarde.
“I very much welcome the decisions taken by the ministers of finance,” European Central Bank chief Mario Draghi told reporters in the moments after the agreement.
“The decision will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece.”
Greece's international lenders agreed on a package of measures to reduce Greek debt by €40 billion, cutting it to 124 per cent of gross domestic product by 2020.
In a significant new pledge, ministers committed themselves to take further steps to lower Greece's debt to "significantly below 110 per cent" in 2022 - the most explicit recognition so far that some write-off of loans may be necessary from 2016, the point when Greece is forecast to reach a primary budget surplus.
"When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," German finance minister Wolfgang Schaeuble said.
Eurogroup Chairman Jean-Claude Juncker said ministers would formally approve the release of a major aid instalment needed to recapitalise Greece's teetering banks and enable the government to pay wages, pensions and suppliers on December 13th.
Greece will receive up to €43.7 billion euros in stages as it fulfils the conditions. The December instalment will comprise €23.8 billion for banks and €10.6 billion in budget assistance.
The IMF's share, less than a third of the total, will only be paid out once a buy-back of Greek debt has occurred in the coming weeks, but IMF managing director Christine Lagarde said the Fund had no intention of pulling out of the programme.
Greece is in danger of running out of cash and is reliant on emergency ECB support to stay afloat. At issue again was a push by Ms Lagarde for euro zone countries to bear losses on their financial support for the country.
Greece has been awaiting a delayed loan disbursement of €31 billion and the European Commission believes the country may need an additional €32.6 billion if its deficit-cutting deadline is extended by two years as discussed for months.
The IMF has long argued that debt reduction measures involving a “haircut” on the amount to be repaid – a process known as official sector involvement – are needed to bring the country’s debt to a “sustainable” level of 120 per cent of economic output by 2020.
The European ministers entered the talks having indicated their readiness to trim interest rates on Greek loans and forgo profit on the Greek bonds held by their national central banks for the ECB. Minister for Finance Michael Noonan indicated bailout recipients such as Ireland and Portugal would be exempted from such steps in respect of the aid they granted Greece before they entered their own rescue programmes.
In their effort to settle on a common European approach over the weekend, the ministers discussed allowing individual euro zone countries to adopt separate tailor-made measures to ease the burden on Greece without actually accepting losses.
Plans to ease burden do not apply to Ireland
Any arrangements to ease the burden of Greek national debt will not be applicable to Ireland, Minister for Finance Michael Noonan has said.
Arriving yesterday in Brussels for a third round of talks in as many weeks between euro zone ministers and the IMF, Mr Noonan said he believed a deal for Greece was imminent.
“I’d be hoping that it will conclude satisfactorily this evening, but you know the way these things work, you can’t be absolutely certain. But certainly the ground has narrowed.”
Mr Noonan said there was no plan at present for an official sector involvement arrangement in the normally accepted sense in which euro zone governments would bear losses on their holdings of Greek bonds. It was generally expected that the new package would cut to a negligible level the interest rate on the country’s loans from its euro zone partners.
The package was also expected to include money for Athens to reduce its debt burden by buying its bonds from private investors at below market costs.
Asked if similar flexibility would be granted to Ireland, Mr Noonan said: “The package that’s being discussed wouldn’t be applicable to Ireland. This is a special and particular case. There isn’t a crossover into Ireland’s affairs.”
When it was put to him that any deal might eliminate the interest rate on Greek loans, Mr Noonan said Greece was being dealt with separately.
“We have our own sets of negotiations either in place or will proceed next year, so there isn’t a crossover.”
He said the European ministers spoke by conference call two days ago to establish a unified position, and that the objective now was to find common ground with the IMF.
“We had a teleconference on Saturday among the Eurogroup, progress was made so I would hope that later this evening the matter will be resolved.”
Europe and the IMF have been at odds for weeks, with the IMF pressing governments to bear losses on their holdings of Greek bonds to bring the country’s national debt to a sustainable level. “There’s a variety of issues but basically it comes down to the ways and means to accommodate the Greek position, but there’s a willingness to do so. It’s working out the detail now.”
