Greek Reforms a Must for Deal
Business + Economy

Greek Reforms a Must for Deal

Greece must make "difficult" decisions in the coming days to clinch a debt swap agreement and a 130 billion euro bailout package needed to avoid an unruly default, the government said on Tuesday. Near-bankrupt Greece is struggling to convince skeptical lenders it can ram through spending cuts and labor reform to help bridge a funding shortfall driven by a worsening economic climate and its previous reform plan having veered off track.

With a long-awaited debt swap deal largely almost secured, Athens' focus is now squarely on the reform front. Failure to persuade lenders it can follow through on its pledges could put both the bond swap and the country's latest bailout at risk. "It's all down to whether the Greeks manage to convince the troika that they will implement the necessary austerity measures," a source close to the talks said, referring to so-called "troika" of foreign lenders – the European Central Bank, the EU and the International Monetary Fund.

Finance Minister Evangelos Venizelos confirmed talks on both the swap and bailout were "converging" and "co-dependent," and said Athens was "one formal step away" from closing a deal with private bondholders to restructure 200 billion euros of debt. "Without the new (bailout) program we cannot have the necessary funding and the debt swap cannot be completed," he said. "In the next few days, our country needs to take difficult decisions and to complete a gigantic effort which rewards the sacrifices, the achievements and the hopes of the Greek people."

A senior Greek banker earlier said a final accord on the bond swap was on hold until Athens can show it is serious about tackling reforms. "The debt swap agreement is ready, but it will not be announced before the end of the week and until the government has made certain commitments on reforms, labor issues and the pension system," said the banker, who declined to be named. "By delaying the debt swap, European partners are putting pressure on the government and political leaders to make certain commitments."

Negotiations on the swap could wrap up as early as Wednesday, bankers and officials said, but European Central Bank action to further reduce the burden is now seen as imperative and is proving a sticking point.


Prime Minister Lucas Papademos on Tuesday confirmed that Athens was aiming for a definitive agreement on the debt swap by the end of this week – roughly the same time it expects to conclude talks with lenders in Athens on its second bailout. Papademos acknowledged the main sticking points in talks with the troika revolved around spending cuts and labor reform.

On top of austerity measures already taken that regularly bring droves of angry protesters onto the streets, Greece's lenders have demanded it make extra spending cuts worth 1 percent of GDP – or just above 2 billion euros ($2.6 billion) – this year, including big cuts in defense and health spending. In a sign of the challenges the government faces in pushing those through, a Greek union official said the country's major unions were gearing up for more anti-austerity protests next month after an early grace period for Papademos’s government.

Talks with the troika have struggled over further cuts in labor costs in the private sector, which Athens has resisted over fears they could deepen a brutal recession and impose additional hardship on the poor, Greek officials say. The prospect of elections as early as April has further complicated the talks, with political leaders in Papademos's national unity coalition eager to distance themselves from any cuts that herald more pain for ordinary Greeks.

Increasingly exasperated by Athens' failure to live up to pledges on the reform front, European partners have demanded all Greek parties commit to measures agreed under the bailout irrespective of who wins the next elections. A German minister went so far as to call for Athens to surrender control of its budget policy to outside institutions if it could not implement reforms, though Berlin has toned down the debate after an indignant reaction from Greek officials.

Underscoring the stakes involved, ECB Governing Council member Ewald Nowotny said whether Greece stays in the euro zone depended on its ability to push through a series of measures. "I hoped that these measures will be implemented but one cannot probably be absolutely sure," Nowotny told Austrian radio station ORF.


As part of the swap, banks and insurers would take a 50 percent writedown on the notional value of the Greek debt they hold, easing Athens' debt load by 100 billion euros. Their actual losses on the holdings are expected to be closer to 70 percent, however, based on an average coupon of under 4 percent – a level the two sides have converged on after several rounds of talks, the senior Greek banker said.

Venizelos told lawmakers that investors' losses may top 70 percent. "There is a very serious discussion based on new facts. We are talking about a PSI much greater than the original," he said. "We are talking about a haircut on the net present value exceeding 70 percent."

Despite that scale of writedown, however, officials said it was unlikely to be sufficient to reduce Greece's debts to a targeted 120 percent of GDP by 2020. Instead, there is a growing awareness of the need to involve public sector owners of Greek bonds – the ECB and national euro zone central banks – in the restructuring, European officials and bankers said. "The analysis is being done right now to see what steps the official sector can take in reducing Greece's debts," one EU official familiar with the talks told Reuters. "The goal is to get the debt-to-GDP down to 120 percent, but even with PSI it's still substantially above that, so there needs to be official sector involvement."

The talks previously had been complicated by hedge funds that built up positions in Greek bonds, as they hoped the country would go under so that insurance against the debt could be paid out, or that they would be paid in full by holding out. Greece has responded by threatening to enforce losses on investors who do not voluntarily sign up to the swap. It needs to wrap up both set of talks by mid-February at the latest to ensure it gets money in time to avoid a messy default when 14.5 billion euros of bond redemptions fall due in March.

Without a deal and a subsequent release of funds from the bailout plan, Greece would sink into an uncontrolled default that risks spreading turmoil across the euro zone and tipping the global economy back into recession. Venizelos said euro zone finance ministers would meet on Monday to discuss Greece. But a spokesman for Jean-Claude Juncker, who chairs these meetings, said: "Nothing has been decided yet about a Eurogroup meeting next week."

Venizelos also said the Greek parliament must back deals on the debt swap and the new bailout by February 13. ($1 = 0.7639 euros)

(Additional reporting by Renee Maltezou in Athens, Sophie Sassard in London, Luke Baker and John O'Donnell in Brussels; Writing by Deepa Babington)