Europe Weighs Rates Cut, ECB Role to Close Greek Gap

European governments are considering cutting interest rates on emergency loans to Greece and using contributions from the European Central Bank to plug a new financing gap in the second bailout program for Athens, two people familiar with the discussions said.

Finance ministers wrangled over how to close the funding hole in a teleconference last night after seeing estimates that Greece’s debt would fall to 129 percent of gross domestic product in 2020, missing a target of 120 percent, said the people, who declined to be named because the talks are still in progress. Last year, the level was about 160 percent.

With the new obstacle in talks over the full program, the ministers’ next meeting on Feb. 20 may be limited to kicking off a bond exchange with private investors that is critical to staving off a Greek default in March, the people said.

As recriminations fly between Greece and its northern European creditors, the clock is ticking toward a March 20 bond redemption when Greece must make a 14.5 billion-euro ($19 billion) payment or become the first country in the euro’s 13- year history to default.

Europe is taking a “stricter stance” on Greece after two years of missed deficit-reduction targets, Estonian Finance Minister Jurgen Ligi told reporters in Tallinn today. “Critical voices are sounding louder than others.”

A two-step decision — authorizing the bond exchange next week and then completing the 130 billion-euro public aid program — would raise political risks by requiring two votes in some national parliaments.

Summit Showdown

It would also turn a planned March 1-2 summit of European leaders into a showdown over Greece, after countries including the Netherlands and Finland called for delaying the full package until after Greek elections in April or later.

A consensus is forming to charge Greece lower rates, one of the officials said, while central bankers have indicated that the ECB could funnel future profits from its Greek bond holdings to national governments and on into the crisis program.

Greece obtained its first, 110 billion-euro loan package in May 2010 at rates averaging 5 percent. Euro governments have already cut that figure once, to about 4 percent in March 2011.

Central bankers have agreed that they “don’t wish to make a profit on Greece,” ECB Governing Council member Luc Coene of Belgium said this week. An ECB spokesman today declined to comment.

French Proposal

More controversial is a proposal for national central banks to take part in the private exchange by accepting losses on Greek bonds in their investment portfolios. France is virtually alone in backing that idea, one of the officials said.

The Netherlands, meanwhile, is pushing to saddle bondholders with bigger losses by reopening a “private sector involvement” or PSI agreement for investors to write off roughly 100 billion euros of Greek debt. Investors have agreed to terms with a loss of about 70 percent of the net present value of their holdings.

“We don’t rule out a bigger PSI, but we clearly belong to a small minority on that point because the PSI that has been taken is a enormously big step,” Dutch Finance Minister Jan Kees de Jager told parliament in The Hague today.

The bond exchange can only go ahead once governments authorize the European Financial Stability Facility to provide 30 billion euros, to be used in cash or collateral as an incentive to investors.

“The decisions on PSI need to be made very quickly,” Deutsche Bank AG analysts Gilles Moec, Marco Stringa and Mark Wall said in a note to clients today. “Whether or not the debt exchange makes a crucial difference to the probability for the sovereign to adjust successfully, any future accident in Greece will be more manageable, in terms of European financial stability, after PSI.”

By James G. Neuger

Courtesy of Bloomberg News

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