Greece is still in financial limbo. A 12-hour negotiating session in Brussels among the euro group – the euro zone's 17 finance ministers – failed to reach an agreement on how to prevent Greece from going bust in the next few weeks and put its debt on a sustainable footing over the long term.
It was hard to tell whether the differences among the ministers were trivial or so serious that yet another delay is in the offing. Officially, the euro group has made progress, stating late Tuesday evening that it needed more time to "allow further technical work on some elements." The ministers will meet again on Nov. 26 to try to thrash out a deal.
But it is well known that the International Monetary Fund, the co-sponsor of Greece's twin bailouts since the spring of 2010, and the euro group are at great odds over Greece's debt to gross domestic product targets. A few days ago, IMF managing director Christine Lagarde said a debt solution for Greece should be "rooted in reality and not wishful thinking."
Well, indeed. The euro group reportedly would like to see Greece's groaning debt load, which is soon to reach a eye-watering 190 per cent of GDP (well more than twice the euro zone average), fall to 144 per cent by 2020. The IMF wants the figure set at 120 per cent.
The markets were not comfortable with the stalemate. On Wednesday morning, the euro had lost more than 0.40 per cent against the dollar, trading at $1.276. In London, the FTSE-100 index was down marginally.
The euro group and the IMF are negotiating what is, in effect, a third bailout for Greece, though one without the end-of-the-world headlines associated in the frantic days of the first two bailouts, when Greece's financial collapse and exit from the euro zone were clear and present dangers. Still, the amounts this time around are significant. The Greek government, led by prime minister Antonis Samaras, is seeking €31.5-billion ($40.3-billion U.S.) in overdue loans from the previous bailout, plus an additional €12-billion or so in credit to keep the state functioning through the end of the year.
Athens will also need €15-billion to cover a funding shortfall related to the decision to extend its bailout conditions by two years. The extension was designed to give it more time to meet austerity targets, recognition that cutting too far too fast was only killing any chances of a return to economic growth.
The IMF and the Eurogroup are not putting Greece at fault for the endless delays in knocking together a new financing package. To be sure, Greece is making some progress even as its economy continues to sink. It has posted a three-month current account surplus and falling wages are making the economy somewhat more competitive. "It is clear that Greece has delivered," Luxembourg's Jean-Claude Juncker, chairman of the euro group, said before Tuesday's euro group meeting.
The key problem is how to get Greece's debt down to sustainable levels. A mish-mash of options are said to be under discussion. Options include interest rebates or reductions, interest-free loans, debt maturity extensions and the repurchase by the Greek treasury of privately held sovereign bonds, which trade at about a quarter of their face value.
All of this, of course, constitutes fiddling. With German Chancellor Angela Merkel facing re-election next year, she is wary of supporting a deal that would cost German taxpayers dearly. German voters' tolerance for endless transfers to Athens is at rock bottom.
Everyone knows real solution. If the IMF and the euro group want to see Greece with a debt-to-GDP ratio of 120 per cent or less, the acronym – OSI – that keeps surfacing only to be quickly swept under the carpet has to be pursued. OSI stands for official sector involvement, that is, the write-off of Greek sovereign debt held by public creditors such as the European Central Bank and the German treasury. But OSI is off the table. ECB boss Mario Draghi has said repeatedly it is not an option.
But at some point is has to be an option if, as Ms. Lagarde says, Greece's fix-it effort is to be "rooted in reality." Some enlightened politicians and technocrats already know this. "At the end of the day, we will not be able to avoid a debt haircut involving Greece's public creditors," said Gunther Oettinger, Germany's representative on the European Commission, recently, according to Spiegel Online.
Earlier this year, the private owners of Greek debt took a €100-billion haircut. If they took some pain for the sake of Greece's future, how can the public owners avoid the same treatment?