Euro Crisis: Battle Over EU Financial Firewall Threatens to Derail Greek Bailout

A battle over an increased eurozone bail-out fund and International Monetary Fund support for the European Union’s single currency threatens to derail the latest Greek bailout.

Many economists question whether Greece can pay off even a reduced debt burden, suggesting the deal may only delay a deeper default by a few months. Photo: Roberto Pla/Flickr

Euro zone finance ministers agreed a 130-billion-euro ($172 billion) rescue for Greece on Tuesday to avert an imminent chaotic default after forcing Athens to commit to unpopular cuts and private bondholders to take bigger losses.

After 13 hours of talks, ministers finalized measures to cut Athens’ debt to 120.5 percent of gross domestic product by 2020, a fraction above the target, securing a second rescue in less than two years in time for a major bond repayment due in March, reports Reuters.

“We have reached a far-reaching agreement on Greece’s new program and private sector involvement that would lead to a significant debt reduction for Greece … to secure Greece’s future in the euro area,” Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, told a news conference.

At a G20 summit in Mexico in two days the EU will plead for increased IMF contributions by non-euro countries to help shore up a eurozone “financial firewall” seen as vital to protecting Spain and Italy from Greek debt contagion, says The Telegraph.

The IMF will refuse to make extra cash available to the EU and will threaten to pull the plug on its contribution to Tuesday’s €130bn bailout of Greece unless the eurozone creates a €750bn fund, a move opposed by Germany.

lli Rehn, the EU’s economic and monetary affairs commissioner, insisted that a plan to merge two eurozone bailout funds was vital over the next 10 days. Mr Rehn is seeking to fuse the existing European Financial Stability Facility (EFSF) fund, worth €250bn, with a new European Stability Mechanism (ESM), to be created this summer and worth €500bn.

“This is very important to show that we have credible instruments to ensure we have financial stability in Europe,” he said. “It is also very important to encourage our international partners in the G20 and IMF to move in order to increase the resources of the IMF, which form a global financial firewall but also contribute significantly to the European financial firewall.”

Many economists question whether Greece can pay off even a reduced debt burden, suggesting the deal may only delay a deeper default by a few months.

Swedish Finance Minister Anders Borg said: “What’s been done is a meaningful step forward. Of course, the Greeks remain stuck in their tragedy; this is a new act in a long drama.

“I don’t think we should consider that they are cleared of any problems, but I do think we’ve reduced the Greek problem to just a Greek problem. It is no longer a threat to the recovery in all of Europe, and it is another step forward.”

A report prepared by experts from the European Union, European Central Bank and International Monetary Fund said Greece would need extra relief to cut its debts near to the official debt target given the worsening state of its economy.

If Athens did not follow through on economic reforms and savings to make its economy more competitive, its debt could hit 160 percent by 2020, said the report.

“Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it,” the nine-page confidential report said.’

“Greece has made its choice and we now have to focus on the next step, which is constructing a firewall large enough to prevent contagion within the eurozone,” David Cameron, British Prime Minister, said.

The IMF’s board will meet in March to decide on its contribution to a new Greek bailout, support that will be linked to the firewall decision.

“I welcome discussion on ensuring the adequacy of the EFSF and ESM, which will help bolster the firewall against financial contagion, catalyse efforts to enhance IMF resources, and help secure global stability for the benefit of all,” said Christine Lagarde, the IMF’s director, on Tuesday.

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