EU must make tough decisions on Greek rescue: IMF

Europe must take tough decisions before the IMF can release its next block of aid for Greece, the Fund warned on Tuesday, while ratings agencies and German banks cast doubt on whether private investors can be expected to help. Plans for a second international bailout of Greece are taking shape, with a proposal for a three-year package worth 80 to 100 billion euros set to be ready in the next two weeks, eurozone official sources said.
In Athens, a senior Greek official said the government expected parliament to vote by the end of June on its medium-term austerity plan, a condition for the new package as Athens struggles to avoid defaulting on its debt. But Bob Traa, the International Monetary Fund's senior representative in Greece, said the European Union needed to do more work before the Fund's board could release more loans.
"I believe there is a summit in Europe, in June, where some hard nuts need to be cracked. They need to make some decisions, and then we will go to our board and disburse in early July," he told a banking conference. A team from the IMF, EU and European Central Bank reached an agreement last Friday, under which Athens would impose more austerity and faster privatisation to cut its budget deficit.
But EU officials are struggling to find a solution for Greece's financing needs for the next few years which avoids triggering a default but pushes some of the burden onto the private sector. "What needs to be decided is how to fill the various parts of the financing. This is not something that we can do as a team," said Traa. Greece agreed a 110 billion euro ($160 billion) rescue with the EU and IMF a year ago. But this assumed Athens could resume borrowing commercially in early 2012, which is not now feasible as yields on Greek debt are sky high in the secondary market.
Details of the new deal to supercede the May 2010 rescue have yet to be worked out, but it assumes Greece's funding needs will be covered by a mix of new EU and IMF loans, budget deficit cuts including tax increases and state asset sales, and a "voluntary" participation by private creditors. One possibility is that creditors would agree to buy new Greek bonds when bonds they are currently holding mature, meaning Athens would not have to find cash for repayment.
Slovakia said on Tuesday it would not approve fresh aid for Greece unless private investors bore part of the burden. But credit rating agency Moody's said it was hard to see how a private sector rollover of Greek debt could be truly voluntary, and that such a move would therefore probably constitute a credit event - a ruling that would have far-reaching market repercussions such as triggering payouts on financial instruments used to insure against default.
"It's hard to imagine in the current circumstances that people would voluntarily do this," Bart Oosterveld, managing director of Moody's sovereign risk group, told reporters in Paris. "Our default definition contemplates that for something to be voluntary it has to be truly voluntary ... More likely than not this would be a credit event in our view."
German banks also demurred. "The involvement of private creditors can come only as a last step as part of a solution that is sustainable for all parties," Germany's BDB banking association said on Tuesday.
"That point has not yet been reached." The IMF's Traa warned that a major restructuring of Greek debt would create untold problems in the eurozone but hinted that the Fund was open to other solutions. "Stretching out payment terms, for instance in loans from euro area partners and the IMF, is a reasonable thing to think about because we have amortisation right at the end of the programme. This is a technical issue we can think about," he said.