Analysis: Euro zone debt forgiveness lies ahead in Greek mire

Tue Nov 27, 2012 1:21pm EST
 
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By Luke Baker

BRUSSELS (Reuters) - Within minutes of euro zone finance ministers reaching a deal to cut Greece's debt late on Monday, commentators on Twitter were dismissing it as another exercise in "kicking the can down the road".

To an extent that is true. Under the agreement, the euro zone and the International Monetary Fund will give Greece two more years to reach its budget goals and will find another 44 billion euros ($57 billion) to keep the country afloat in the meantime.

But while a degree of can-kicking may be going on, there was a critical element in Monday night's deal that goes a lot further than any other step taken so far in the debt crisis to get Greece back on its feet.

Implicit was an understanding that Greece will undergo some form of official-sector debt restructuring - with euro zone countries forgiving a portion of Greece's debt - at some point in the future, the sort of last-ditch measure usually reserved for impoverished states in Africa and Latin America.

At a news conference in the early hours of Tuesday, German Finance Minister Wolfgang Schaeuble came closer than he has ever done before to publicly acknowledging that creditors face such an eventuality - a move that will be very hard for the likes of Germany, Finland, Austria and the Netherlands to take.

"When Greece has achieved, or is set to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," he said, looking weary after 13 hours of negotiations.

The timing and reference to a primary surplus are important.

The Greek economy is forecast to return to growth during 2014 and to achieve a primary budget surplus - the balance before deducting the cost of debt financing - of 4.5 percent of gross domestic product (GDP) in 2016.   Continued...

 
From L-R: International Monetary Fund (IMF) Managing Director Christine Lagarde, Luxembourg's Prime Minister and Eurogroup chairman Jean-Claude Juncker and European Economic and Monetary Affairs Commissioner Olli Rehn address a joint news conference after a euro zone finance ministers meeting in Brussels November 27, 2012. REUTERS/Jock Fistick/Pool