The European Union and the International Monetary Fund are preparing a second bailout package for Greece to give the debt-ridden country more time to put its finances on a sustainable path.
Talks are more complicated than a year ago because of reform fatigue in Greece and “solidarity fatigue” in several euro zone countries, which want to see private investors help this time.
Policymakers aim to have a deal ready in time for a June 20 meeting of EU finance ministers.
Euro zone officials involved in the talks say one idea is to have a new programme for three years, from 2011 to 2014. It would entail folding the existing 110 billion euro programme agreed last year, into a new one.
This would mean that if the 12 billion euro June tranche of aid for Greece is paid out, there will be 45 billion euros remaining undisbursed from the original bailout and that would be moved to the new programme.
Another idea is to have a second programme from 2012 to 2015, which in 2012 and part of 2013 would run in parallel to the existing plan and which would take care of the financing gap created by Greece’s inability to return to markets in March 2012 as planned.
After the existing programme ends in 2013, the second plan would continue to help Greece finance itself.The exact amount has not been agreed yet, because it depends on what financing option is chosen and for what length of time.
A decision on which option to choose is likely to be made by euro zone finance ministers at their June 20 meeting.
Officials estimate, however, that the size of the new programme could be below 100 billion euros, on top of the 45 billion left over from the existing programme once the 12 billion euro June tranche is paid out.
The exact breakdown is not agreed yet, because it depends on several variables.
One source estimated the potential size of new loans from the euro zone and the IMF at around 45 billion euros, which could be divided as usual — the IMF adding 50 percent of what the EU is lending, which would mean 30 billion from the euro zone and 15 from the IMF.
The European part of the money would come from the European Financial Stability Facility (EFSF) — euro zone officials say that it was only because the EFSF did not yet exist at the time when the first Greek package was put together that bilateral loans were used for the first bailout.
The EFSF is the favoured vehicle because in this way euro zone governments do not have to raise the cash on the market themselves — they just guarantee EFSF borrowing.
Finland’s parliament has made clear that any new loans extended to euro zone countries in trouble would have to be issued against collateral. However, other countries do not insist on this condition.
The euro zone would like some of the financing to come from Greek privatisation revenues, which are not easy to estimate in size or time with great certainty. Athens has pledged to sell 50 billion euros worth of state assets by 2015, but the programme is likely to be back loaded.
Officials estimate one third of the new programme could be financed from privatisation receipts.
– Private sector involvement. For several euro zone countries, notably Germany, some form of private sector involvement is a must, if Greece is to get more loans, so that the taxpayer is not the only one shouldering the burden.
Again, EU officials hope that about one third of the financing needs under the new programme could come from such private sector involvement.
For the EU, the preferred option would be that banks would roll over their Greek debt as they mature, replacing shorter maturity bonds in their portfolios with longer maturity paper.
Germany proposed the new bonds banks would buy should be seven-year paper under such a scheme.
One euro zone source stressed banks would only buy the new bonds once the old ones matured. This would mean that existing bond contracts are honoured and there is no worsening of conditions for investors — therefore no reason for credit rating agencies to declare such an operation a default.
To give banks an incentive to buy the new, longer maturity bonds, the ECB would accept them as collateral, while the old ones could gradually cease to be accepted.
It is key, however, that such a solution should be voluntarily accepted by banks so as not to trigger what credit rating agencies call a “credit event” or a default.
This is complicated because the head of Moody’s sovereign ratings group said on June 7 it was hard to see how a private sector rollover of Greek debt would be truly voluntary and it would therefore likely constitute a default.
While there is no good argument to convince banks to agree to such a plan, euro zone sources stress it would be very difficult, if not impossible, to get the consent of several euro zone countries like Germany, Finland, Slovakia or the Netherlands to lend more to Greece if private banks are not in any way involved.
