Tags: Greece | Deal | EU | IMF | Austerity

Reuters: Greece Seals Deal With EU, IMF on Austerity Plan

Thursday, 23 Jun 2011 03:23 PM

 

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Greece won the consent of international lenders Thursday for a five-year austerity plan intended to avoid looming bankruptcy, sources familiar with the talks said, and its prime minister pledge to push radical economic reforms through parliament.

After a day of wrangling in Athens, new Finance Minister Evangelos Venizelos clinched agreement with EU and IMF inspectors on extra tax rises and spending cuts to plug a 3.8 billion euro funding gap, the sources said.

"We have a deal," one of the sources said as Prime Minister George Papandreou was meeting fellow EU leaders at a Brussels summit dominated by Greece's debt crisis.

There was no immediate official confirmation, but the euro rebounded against the dollar and U.S. stocks pared losses after the Reuters report of the agreement.

European Union leaders insisted that the Greek parliament must enact deep spending cuts, more tax hikes and a major sell-off of state assets to secure desperately needed aid and avoid a potential default in mid-July.

Prime Minister George Papandreou said on arriving at a summit with fellow EU leaders he was committed to pushing the deeply unpopular austerity plan through parliament next week.

"Greece is committed, strongly committed, to continue a very important program for major changes, radical changes, to make our economy viable," he told reporters.

EU leaders also pleaded with conservative Greek opposition leader Antonis Samaras to rally behind the austerity program, but he maintained his refusal to vote for the plan.

Euro zone governments are meanwhile talking to banks and insurance companies to try to convince them voluntarily to maintain their exposure to Greek debt when their bonds mature, as part of a possible second rescue for Athens.

Venizelos, appointed last week, had wanted to change some measures Greece had already agreed with the EU, International Monetary Fund and European Central Bank and present a slightly softer package to parliament for approval on June 28, in an effort to win over an angry and frustrated Greek public.

But the changes meant Athens would have fallen short on its austerity promises, so the gap has been closed by lowering the income tax threshold to 8,000 euros and raise heating oil taxes.

"Our basic aim is to regain our credibility," Venizelos said.

Analysts welcomed the deal. "It helps that Greece is sticking to its austerity plan. Germany, EU and IMF are in active negotiation with Greece which will be stuck to. In general this is good news and it will help," said Perry Piazza, director of investment strategies with Contango Capital Advisors in San Francisco.

If the package is approved, the EU and IMF should release a next tranche of emergency loans -- 12 billion euros ($17 bln) -- by mid-July, allowing Athens to escape bankruptcy.

"All conditions must be met," Luxembourg Prime Minister Jean-Claude Juncker told reporters. "If Greece does what it has to do, we will do what we have to do. This is not a threat. It's just a confirmation that we're continuing our efforts."

German Chancellor Angela Merkel, who has taken perhaps the toughest line on Greece, urged the Greek opposition to do what was necessary and get behind the package. "In such a situation, everyone must stand together in a country," she said.

HELP GREECE TO HELP ITSELF

While Papandreou has expressed confidence over the June 28 vote in public, Slovak Prime Minister Iveta Radicova said he had voiced uncertainty in a private telephone call Wednesday.

"Papandreou has serious doubts about whether the necessary steps will pass in parliament," Radicova told the Slovak parliament's European affairs committee.

The Greek crisis dominated debate at the summit, the fourth the EU's 27 leaders have held this year as they grope for a solution to debt woes that have forced Greece, Portugal and Ireland to seek bailouts and roiled global financial markets.

No formal decisions were expected on Greece but the gathering will be monitored intensely by financial markets for any message it sends on whether the EU plan can work. Leaders were expected to agree a statement on Greece during a dinner on Thursday.

But investors are skeptical. Five-year credit default swaps on Greek government debt rose 138 basis points to 2,025 bps, according to data monitor Markit, implying a more than 80 percent probability of default over that period.

U.S. Federal Reserve Chairman Ben Bernanke stressed on Wednesday that much more than the future of Greece was at stake.

"If there were a failure to resolve that situation, it would pose threats to the European financial system, the global financial system, and to European political unity, I would conjecture, as well," he said.

A Greek default would force European banks and governments to take big losses, spread contagion to other stressed euro zone sovereigns and potentially plunge the economy of the world's biggest trading bloc, already slowing, into recession.

GETTING BANKS ON BOARD

Even if Greece manages to persuade the EU and IMF that it is fully committed to making the budget adjustments demanded, it will only buy the government a few months' respite and most economists expect Athens will have to default eventually.

Greece accepted a package of 110 billion euros of EU/IMF loans in May 2010 and now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

Euro zone member states, led by Germany, insist any second aid package must involve the private sector. But credit rating agencies have said they would treat even a voluntary debt rollover as a selective default, potentially starting a chain reaction of turmoil in markets.

"We are working on a solution which is based on a voluntary rollover and I expect it will not create a credit event," Rehn said, explaining that part of the aim was to keep discussions on a national level so that voluntary agreement is reached.

At meetings Wednesday, banks and insurers in Germany, France, Spain and Belgium were asked by national financial authorities to roll over their holdings of Greek debt voluntarily when the bonds mature.

A financial source said Franco-Belgian banking group Dexia is prepared to roll over its exposure to Greek debt, the biggest among Belgian banks, adding to the list of banks prepared in principle to take part.

© 2014 Thomson/Reuters. All rights reserved.

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