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Eurogroup to Decide on Financing Greece Through 2014, Not 2016 -Sources

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BRUSSELS--On the eve of a crucial meeting on Greece's bailout program, its creditors were edging toward consensus on how to reconcile the need to stop it from going bankrupt, and their reluctance to lend it more money.

At a meeting of technical teams from the European Commission, the European Central Bank and the International Monetary Fund, the creditors examined the possibility of extending a moratorium on repayments for Greece by ten years to 2032, as well as accelerating disbursements from earmarked rescue funds to finance a debt buyback, two officials with direct knowledge of the negotiations told Dow Jones Newswires Monday.

They also discussed a sharp cut in the interest rate payable on 53 billion euros ($67.77 billion) of loans made by European countries under Greece's first bailout program in 2010, but there was no suggestion that they would agree to write down their claims, as many at the International Monetary Fund would like.

"A haircut remains unimaginable," German finance ministry spokeswoman Marianne Kothe said in Berlin Monday.

The officials said the Tuesday meeting would address only how to bridge a EUR15 billion gap in the country's financing through to 2014, but would not decide how to tackle the additional EUR17.6 billion Greece will need to stay financed from 2014 to 2016. The one thing parties seemed to agree on, the officials said, was that no new funding beyond what's already been agreed should be made available to the country.

The euro zone's apparent inability to create clarity more than a couple of years down the line sets it up for another clash with IMF Managing Director Christine Lagarde, who has insisted on a credible medium-term strategy for bringing Greece's debt down to a sustainable level by 2020 in return for the Fund's continued support. The Fund is still resisting European efforts to stretch that deadline out to 2022, officials said.

As such, officials don't expect a final decision on disbursal until a teleconference call between on Nov. 28.

One official noted that the situation would not have been as intractable had Eurogroup President Jean-Claude Juncker not ambushed Ms. Lagarde last week by publicly stating there was a high likelihood of an extension. The official said Mr. Juncker had irked the Fund chief, which caused her to dig in to avoid looking weak.

Germany, the largest European creditor in absolute terms, has suggested disbursing bailout funds to Greece ahead of schedule in order to let it buy back outstanding bonds and retire them, European officials said.

In theory, this could reduce the debt stock and help meet IMF funds for a large, up-front reduction in debt, but it would fall far short of bridging the funding gap on its own. Moreover, the program's funds are already earmarked for budget purposes and bank recapitalization, and couldn't be diverted without some impact on those two areas.

Since a bond exchange earlier this year, there are about EUR63 billion of Greek bonds held by private creditors. Of that, more than EUR20 billion euros are held by Greek banks, which would need further funds for recapitalization if they participated in a new exchange at below face value. Greek 10-year bonds trade at 33 cents, but other bonds issued in the exchange trade as low as 23.5 cents.

IMF officials grumble privately that, without action to cut the debt load now, Greece's debt will be more than EUR50 billion euros above what the Fund considers sustainable by 2020.

The euro-zone creditors are instead looking at a sharp reduction in interest rates on the EUR53 billion they lent Greece under its first program. The rate charged is 1.5 percentage points over the three-month Euribor reference rate, currently at 0.19%.

Cutting it further would mean states like Italy and Spain, whose borrowing costs are higher, would be taking losses to fund their bit of the Greek bailout. One option under examination was distributing the profits made by countries with lower borrowing costs, such as Germany, to offset such losses.

Any cut in interest rates for Greece would likely have consequences also for the Irish and Portuguese aid programs, because of a principle of treating all three euro-zone countries receiving bailouts equitably, officials said.

The creditors are also working on a mechanism to impose even tighter control over the Greek government's use of the funds. An initial plan to have given Klaus Regling, managing director of the European Stability Mechanism, co-signing powers over government spending has, however, morphed for legal reasons into a right of near-simultaneous audit over the Greek Finance Ministry.

Harriet Torry in Berlin, Matthew Dalton in Brussels, Neelabh Chaturvedi in London and Ian Talley in Washington contributed to this article.

Write to Matina Stevis at matina.stevis@dowjones.com

 

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(END) Dow Jones Newswires

November 19, 2012 14:15 ET (19:15 GMT)

Copyright (c) 2012 Dow Jones & Company, Inc.

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