BRUSSELS — Euro-zone finance ministers withheld approval for a second Greek bailout Thursday and demanded fresh proof from Greece’s political leaders that they were ready to deliver on past and new pledges to seal a second bailout package as early as next week.
After a meeting Thursday, the ministers said they will meet again Wednesday to push through the EUR130 billion ($173 billion) bailout that Greece needs to avoid default.
But first, the Greek parliament must approve new austerity policies and a package of economic overhauls and the government should detail how it would bridge a fiscal gap of EUR325 million to meet budget targets this year.
“We still have a lot of work to do by next Wednesday,” Dutch Finance Minister Jan Kees de Jager said after the meeting. “Greece have been given their homework, which is explaining what’s in the EUR325 million.”
Greek finance minister Evangelos Venizelos put the country’s choices in starker terms saying Greece must make a “final, strategic” decision about its membership in the euro zone over the next six days.
“We have to decide between tough decisions and tougher decisions,” Venizelos told reporters after the meeting.
Venizelos said there had been objections from a number of other countries that Greece hadn’t fully set out how it would find the necessary savings for 2012.
Earlier Thursday, Greek Prime Minister Lucas Papademos said that political leaders supporting his government had agreed on a reform package following days of difficult negotiations with a troika of lenders–the European Union, the European Central Bank and the International Monetary Fund. European economic and monetary affairs commissioner Olli Rehn confirmed that the EU had received a staff level agreement between Greece and the troika.
But Rehn said this wasn’t enough to unlock a fresh bailout package.
“It’s up to the Greek government by concrete actions through legislation and other actions to convince its European partners that the second program can be made to work,” he told reporters on his way into the meeting.
German Finance Minister Wolfgang Schaeuble said he was confident Greece could complete its debt restructuring in time for a March 20 debt repayment. But conditions for a final agreement on a new bailout package are “not there yet,” Schaeuble said.
Thursday’s political deal in Athens followed protracted overnight negotiations between Greece’s main political leaders–from the Socialist, or Pasok, party, the conservative New Democracy party and the small nationalist Laos party–over what measures they were prepared to sign up to win the bailout deal.
The three political party bosses had earlier agreed to most of the creditors’ demands, including private sector wage cuts and public sector job cuts, but during night-long negotiations they were divided over a plan for deep cuts in pension benefits, leaving a roughly EUR300 million shortfall in this year’s budget targets. Officials later said an agreement was reached but no details were announced on how the gap would be covered.
As the focus of the discussions shifted to Brussels, officials indicated patience with Athens was wearing thin.
“What’s important in Athens isn’t important for everyone else,” a European government official told Dow Jones Newswires, adding that “there is a list of 10 to 15 questions” about the Athens political deal announced Thursday that need answering.
The EU and IMF are considering a number of options to ensure Greece prioritizes repayment of debt ahead of funding government operations. One of these is the creation of an escrow account that would control the bailout funds and have the power to repay Greece’s debt before lending to the Greek government.
“We are considering it seriously because it is one relevant possibility for reinforcing surveillance and also effective implementation of the program,” Rehn said after the meeting.
Several ministers have made it clear they want to see what parliamentary backing the coalition government can muster for new measures before giving a green light for the package.
The first crack in the government’s unity came earlier Thursday with the resignation of Deputy Labor Minister Yannis Koutsoukos.
“Our creditors ignored the arguments and factual proposals of the Labor Ministry and those of the finance minister. In an extortionate manner which is completely improper and shameless, they [creditors] imposed measures which demolish the structure of labor relations,” he said in a statement.
Still, the coalition has a big majority and the government should be able to win parliamentary backing for the measures despite expected defections. The first votes could come as early as Sunday.
But Greece is walking a tight timeline. It needs the new bailout and a debt restructuring deal in place before March 20 when it currently faces a EUR14.4 billion debt payment. Without the two deals in place, Greece is very likely to default.
A debt swap intended to cut Greece’s private-sector debt by about EUR100 billion is “practically finalized”, Rehn said.
The debt-restructuring deal appeared near completion after private-sector creditors indicated earlier they would accept lower interest rates on new Greek bonds they will receive after a 50% haircut.
Under the draft agreement with the troika of official lenders, Greece will slash minimum wages in the private sector by 22%, abolish permanent jobs in state enterprises and cut 150,000 jobs in the public sector by 2015, among other measures.
The economy is expected to contract 4% to 5% in 2012, but return to growth next year, although many private-sector economists are skeptical that Greece’s economy is anywhere close to coming out of recession.
The international lenders had asked Greece to come up with EUR3.2 billion in spending cuts for 2012 alone. They also sought the mass layoff of some 15,000 civil servants in Greece’s bloated public sector in 2012, as well as steep cuts in supplemental pensions paid to retirees.
While Greece comes under pressure to implement the tough reforms, fresh protests loom. Greek unions called a 48-hour strike beginning Friday as anger mounts over round after round of austerity.
At an October summit, it was decided that private-sector haircuts would suffice to bring the ratio of Greek debt to gross domestic product down to 120%. On those assumptions, leaders agreed to grant Greece a second bailout of up to EUR100 plus an extra EUR30 billion that Greece could use as sweeteners to lure in private creditors taking losses in its debt restructuring.
But as the Greek economy continued to deteriorate since October, the agreed bailout may not be enough to cover Greece’s funding needs leaving a gap of up to EUR15 billion that may still need to be filed.
The ECB could carry some of those losses by agreeing not to make a profit on some of the Greek bonds it purchased under its bond-buying program. Ahead of Thursday’s meeting, ECB President Mario Draghi said the ECB couldn’t accept a loss on its holdings of Greek bonds, but didn’t entirely rule out some role for the institution in a new bailout package for the Greek government.
-By Matthew Dalton, Matina Stevis and Costas Paris, Dow Jones Newswires; +32 (0)2 741 1481; email@example.com
(Geoffrey T. Smith, Laurence Norman and Frances Robinson in Brussels, Alkman Granitsas and Stelios Bouras in Athens, and Margit Feher in Frankfurt contributed to this article.)