Greece likely to get aid tranche

By Ingrid Melander and Ben Deighton

ATHENS/LUXEMBOURG (Reuters) – International lenders said on Friday they expect to provide Greece with a next slice of aid in July to avert a looming default, after they conduct further talks on a tougher economic program for Athens.

The chairman of euro zone finance ministers said after meeting the Greek prime minister that he expected European partners to agree to extra on financial assistance for Athens under strict conditions. He gave no figures.

A joint statement by the European Commission, the European Central Bank and the International Monetary Fund said Athens was committed to an ambitious, medium-term plan and would establish an independent agency to manage privatizations.

“Building on the agreed comprehensive policy package, discussions on the financing modalities for Greece’s economic program are expected to take place over the next few weeks.

“Once this process is concluded and following approval of the IMF’s Executive Board and the Eurogroup, the next tranche will become available, most likely, in early July,” it said.

Finance Minister George Papaconstantinou has said Athens would be unable to meet its obligations from mid-July if it did not get the next 12 billion euro EU/IMF loan tranche, originally due to be released on June 29.

Separately, Eurogroup chairman Jean-Claude Juncker said after talks with Greek Prime Minister George Papandreou in Luxembourg: “I expect the Eurogroup to agree to additional finance being provided to Greece under strict conditionality.”

One condition for further aid would be that private sector bondholders would participate in helping Greece on a voluntary basis, Juncker said. He did not say how, which is still under intense debate among EU and ECB officials.

Greek newspaper Kathimerini said a new three-year bailout package for Greece, to run until mid-2014, would be worth a total of 85 billion euros, of which the EU and the IMF would provide less than half.

The prospect of a second bailout for Greece calmed bond market fears of a default and helped ease market pressure on other vulnerable southern euro zone countries including Spain and Italy.

After a month-long review of Greece’s implementation of a 110 billion euro ($160 billion) bailout plan agreed last year, inspectors for the international lenders said on Friday that Greece had made considerable progress, but fiscal and structural reforms had to be stepped up.

The Greek government has drafted a medium-term budget plan featuring deeper spending cuts, measures to boost revenues and a faster sell-off of state assets, which Papandreou presented to Juncker during their two-hour meeting.

OFF COURSE

Greek bond yields and the cost of insuring Greek debt against default fell sharply on Friday after a source familiar with the negotiations told Reuters that euro area officials had agreed in principle on a new rescue program with extra official funding. Greek bank shares rose 4.1 percent.

Athens has veered off course in its current bailout program because of a revenue shortfall due to a deep recession and chronic tax evasion, requiring extra steps worth 6.4 billion euros or 2.8 percent of gross domestic product this year.

The Greek finance ministry said the government had reaffirmed its commitment to the program with decisions in recent weeks, and would finalize new measures in coming days, putting them to parliament after the cabinet approves them.

Leftists staged a protest at the finance ministry in Athens, hanging a huge banner across the building to denounce policies which they said would “turn workers into modern slaves.”

The new program faces rising opposition from trade unions and youth protesters, as well as from some back-bench members of Papandreou’s governing PASOK socialist party.

Increased European funding for Greece may in turn face resistance in the parliaments of fiscally conservative northern states, especially Germany and the Netherlands.

Deputy finance ministers of the euro zone meeting, in Vienna on Wednesday night, reached an outline deal on a three-year program for Greece to run until mid-2014, but detailed funding arrangements remain to be agreed, the source said.

The new plan would effectively supersede the 110 billion euro rescue which Greece agreed with the EU and IMF a year ago.

Whereas taxpayers in donor countries have so far borne the burden of rescuing Greece and fellow euro zone members Ireland and Portugal, the new deal would involve some participation of private sector investors, the source told Reuters.

KICK CAN DOWN ROAD

Some European politicians and economists have argued that investors who bought Greek government bonds should share that burden, perhaps by cutting the value or extending maturities.

Claudio Loser, a former director of the Western Hemisphere for the IMF, said the Fund should push harder for Greece to restructure its debt and negotiate so-called “haircuts,” or reductions in the value of bonds, with investors.

“Greece will have to take one or two of the two actions — restructuring with a haircut and maybe abandoning the euro, although I would say abandoning the euro will be more complicated,” Loser told Reuters Insider television.

The ECB has fought such ideas, fearing it would provoke a crisis among European banks which hold large sums in Greek debt, and lead to a violent chain reaction on financial markets far beyond Greek borders.

The source said the participation of private sector investors in the new deal would be limited to avoid triggering a “credit event.” He gave no figures.

“I think (official lenders) have a plan in their head that is reasonable for kicking the can down the road another three months,” said Gianluca Salford, European fixed income strategist at JP Morgan.

Most market economists polled by Reuters believe Greece’s 340 billion euro debt mountain is unsustainable and will have to be restructured sooner or later.

(Additional reporting by George Georgiopoulos and Lefteris Papadimas in Athens, Marius Zaharia, Ana Nicolaci da Costa and Chloe Hayward in London; Writing by Paul Taylor; Editing by Ruth Pitchford and Andrew Torchia)