EU Official: Greece Needs Extra $20 Billion

Published February 2, 2012 3:09PM (EST)

BRUSSELS (AP) — Greece's international debt inspectors have discovered that the debt-ridden country still needs an extra euro15 billion ($20 billion) in help — on top of a promised euro130 billion bailout and a euro100 billion debt relief from private investors, a European official said Thursday.

The European Commission, the executive arm of the European Union, has asked the rest of the 17-country eurozone to help foot the bill for the missing euro15 billion, the official said, indicating that a limit has been reached of what can be achieved by Athens implementing further spending cuts and private investors taking losses on their Greek bonds.

The gap could be filled either through more help from the other euro countries or by national central banks and state-owned banks like France's Caisse de Depots taking a cut on their Greek bondholdings, the official said. He was speaking on condition of anonymity because of the sensitivity of the matter.

The new push for Greece's public and government creditors to take a cut on their investments — dubbed the official sector involvement, or OSI — is a new front in the battle to save the country from a potentially devastating default. So far the eurozone and the International Monetary Fund have given billions in bailout loans to the struggling country, but they haven't been asked to take losses.

It is also an acknowledgment that Greece's economy is in such a dire state that the country's debt inspectors — the so-called troika of the Commission, the European Central Bank and the IMF — are having a hard time finding more ways in which Athens can save money.

Greece has been at the heart of Europe's debt crisis since it revealed in 2009 that its debt was far larger than its official estimates. It piled on the debt during a decade in which the government overspent and the economy remained stagnant.

The challenge now is reducing the debt at a time when the economy is shrinking. Spending cuts, tax increases and the general uncertainty of the crisis have already pushed Greece into a deep recession, which in turn has eliminated many of the gains from the austerity measures.

Asking private creditors like banks and investment funds to share the burden of saving Greece was the first reaction to this problem; getting the public sector creditors involved is the next.

The official said a deal with private creditors to take losses on their holdings will have to be announced before the end of the week to make sure it can be implemented before Athens has to pay back euro14.5 billion in bonds on March 20.

Experts from national finance ministries will examine the details of the deal on the so-called private sector involvement — or PSI — on Friday, and will likely also discuss how the euro15 billion gap can be closed, the official said.

People familiar with the tentative deal have said it would see investors take losses of more than 70 percent of their holdings. On top of having to accept a 50 percent cut in the face value of their bonds, investors will also receive lower interest rates of between 3.5 per cent and 4.5 per cent and give Greece 30 years to pay back the debt.

If agreed, the deal would end negotiations with bondholders that started this summer and have become increasingly tenuous in recent weeks.

Getting public creditors like central banks or sovereign wealth funds to take a hit may be even more controversial, since any losses or foregone profits ultimately come out of taxpayers' pockets. A spokesman for the German finance ministry, which is seen as one of the biggest opponents of OSI, declined to comment on the financing gap Thurday.

Analysts estimate that the European Central Bank holds euro50 billion to euro55 billion in Greek bonds. The majority of these were bought at a discount by the ECB in the summer of 2010, when the central bank was trying to stabilize their prices. If the bank holds them until maturity it stands to make a hefty profit.

One way of helping Greece would be for the ECB to forego these profits, for instance by selling the bonds back to Greece at the price it paid for them. However, the ECB has so far given no indication that it is willing to do so, with some of its governing board members saying that giving up on profits would clash with the bank's ban on funding national governments.

Alternatively, eurozone states could boost their bailout loans beyond the promised euro130 billion, or provide some, more-limited, relief by further lowering interest rates on these loans.

The euro130 billion second bailout package also still depends on labor market reforms that the EU and IMF are asking Greece to implement. Unions and employers resumed talks on Thursday over troika demands to lower wage costs in the private sector and possibly lower the minimum wage.

By Salon Staff

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