Eurozone gives lifeline to Greece

GREECE will receive a vital loan needed to prevent it from imminent bankruptcy, as work continues on a second aid package to keep the economy of the struggling republic afloat.

Finance ministers from across the Eurozone last night signed off the release of ¤12 billion to prevent the country from sliding into economic collapse.

The decision cleared the way for the approval of a second aid package that will be worked out in the “coming weeks”.

The country’s first bailout of ¤110bn was agreed in May. Without the latest tranche, the Greek government faced bankruptcy within weeks, as it is due to make a huge repayment on its ¤360bn debt by 15 July.

After a conference call among the 17 Eurozone ministers, it was agreed that the ¤12bn bailout would go ahead as long as the IMF’s board signs it off on Friday.

Greek MPs last week approved strict austerity measures, despite widespread protests against deep cuts and major tax rises.

“The Greek authorities provided a strong commitment to adhere to the agreed fiscal adjustment path and to the growth-enhancing structural reform agenda,” said Jean-Claude Juncker, chairman of the Eurogroup.

“Ministers call on all political parties in Greece to support the programme’s main objectives and key policy measures in order to ensure a rigorous and swift implementation.”

The statement added that the “precise modalities and scale” of the private sector’s involvement in a second aid package for Greece, again expected to total ¤110bn, would be determined in the “coming weeks” after further consultation.

While the ¤12bn payment will help Athens cover a bond redemption of ¤5.9bn in August, the government still has a monumental hill to climb if it is to return to debt sustainability, with its debt-to-GDP ratio above 150 per cent.

Athens has repeatedly failed to meet budget targets laid down in the first bailout programme, raising the risk that the crisis will spread across the Eurozone if it is left unresolved.

Greece’s second financing programme is to run from 2011 to 2014 and will come on top of the existing assistance package. As part of the package, Greece is expected to raise around ¤30bn from privatisation, while the EU and IMF will provide around ¤50bn and the aim is for the private sector to contribute around ¤30bn via the rollover of debt.

“The precise modalities and scale of private sector involvement and additional funding from official sources will be determined in the coming weeks so as to ensure that... required programme funding is in place,” Juncker said.

“Ministers agreed that the main parameters of a multi-year adjustment programme for Greece will revolve around a continued strong commitment to implementing fiscal consolidation measures... and concrete structural reform and privatisation.”

EU leaders made a commitment to the second programme at their last summit last month, which should satisfy the IMF’s condition that the Eurozone must promise to finance Greece 12 months ahead for the IMF to contribute.

Despite the release of the next tranche payment, which will provide breathing space for Athens, there is growing concern among EU officials that the strictures being imposed on Greece, including ¤28bn of austerity measures between now and 2015, are too harsh and could cause longer-term damage.

The market still sees an 81 per cent chance that Greece will eventually default, and German finance minister Wolfgang Schaeuble said Berlin was preparing for such an event – even though it does not expect it to happen.

Private financial institutions held talks with finance ministry and central bank officials in Eurozone countries last week to discuss under which conditions the private sector would be willing to help finance Greece and by how much.

Those discussions continue, with the involvement of the private sector in the next package a must for several Eurozone countries, as voters grow increasingly opposed to shouldering the burden of bailing out Greece on their own.

But private sector involvement must be voluntary to avoid triggering another downgrade of Greek debt to default status by ratings agencies, a development that could put the whole Greek banking sector at risk.

The Institute of International Finance, a global association of financial institutions, said on Friday that the “private financial community is ready to engage in a voluntary, cooperative, transparent and broad-based effort to support Greece, given its unique and exceptional circumstances”.

Schaeuble has said German banks wanted to roll over ¤3.2bn worth of Greek bonds maturing to 2014. French banks have reached an agreement on how to roll over part of their Greek debt holdings, French president Nicolas Sarkozy said, but did not indicate the total amount.

A further meeting of Eurozone finance ministers on 11 July will help finalise the second financing package for Greece.