The EU could overcome deep-seated German reservations about a bailout for Greece and agree an aid package this week that seems increasingly likely to involve the International Monetary Fund.
Chancellor Angela Merkel has taken a tough line against offering Greece money, but EU diplomats say efforts are under way behind the scenes to find a solution that she can sell to the German public and is also acceptable to Athens.
Economists differ on how quickly heavily indebted Greece will need financial aid. But failure to reach a deal at the summit would leave it exposed on financial markets and run the risk of it turning directly to the International Monetary Fund for help, a move many EU member states would prefer to avoid.
"I honestly cannot imagine Germany will not act to defend the euro at the summit," said Ulrike Guerot, a Berlin-based analyst at the European Council on Foreign Relations think tank.
"I think Merkel wants to be able to come home from the summit saying she got certain promises from the Greek government that allowed her to agree to a collective European loan for Greece. She can't say this now because she wants to keep pressure on Greece to do more than it's doing now."
European diplomats say any deal could offer bilateral loans of up to 22 billion euros ($29.72 billion) at a cheaper rate than what Greece can get on the open market and that the IMF might provide up to 15 billion euros of the sum.
Germany is holding out against a proposal by European Commission President Jose Manuel Barroso to find a way to offer Greece bilateral loans because opinion polls show Germans do not want Berlin to be the main paymaster.
Merkel also faces an important regional election in May that she can ill afford to lose. Demonstrating that she has fought hard and won firm promises of action from Greece could burnish her standing and avert an embarrassing defeat that threatens her majority in the Bundesrat upper house of parliament.
European diplomats said EU President Herman Van Rompuy was now trying to find a solution that would satisfy Merkel and prevent the bloc's divisions on Greece from spilling into the open again and destabilizing markets, as they did at a summit in Brussels last month.
"He wants a consensus before Thursday," one envoy said, referring to the first day of the summit.
HOW LONG CAN GREECE HOLD OUT?
The need for a deal is politically important for the 27-nation EU, and particularly for the 16 countries that use the euro and want to protect the single currency's reputation.
The need for a deal is becoming increasingly urgent for Greece because it has debt bills to pay, even though Athens says it wants an aid mechanism put in place to reassure investors rather than actual aid.
The head of Greece's PDMA debt agency said last week 23 billion euros of Greek debt would fall due from April 19 to May 23, and that Athens needed to borrow 16 billion euros by the end of May. It has redemptions on treasury bills on April 23.
"According to our own calculations, the Greek PDMA has to get active ahead of April 23 T-bill redemptions," said David Schnautz, a bond analyst at Commerzbank in Frankfurt.
"The current cash balance should just be enough to pay back the bond maturing on April 20 -- but with very little slack permitted."
Other economists said Athens would be able to get by for now. Ben May, an economist at Capital Economics, estimates that if Greece were forced to borrow at a rate of 6.5 percent from now on, its annual interest costs would rise to about 16.5 billion euros from 12.9 billion -- a manageable amount for an economy that generates 240 billion euros a year.
That raises the possibility that Greece could limp along for months, hostage to Germany's tough line on aid.
"Greece has to roll over a lot of money in April and May. It might manage to do that but the idea that it could get through the rest of this year unaided is pretty implausible," said Simon Tilford of the Centre for European Reform think tank.
"There is pressure now to agree to something at the summit but it has to be something that Germany can accept and also prevents Greece going (directly) to the IMF. It will be hard."
INVOLVING THE IMF IN TWIN-TRACK APPROACH
Faced with such political and financial pressures, European leaders are talking increasingly about the possibility of involving the IMF in any aid deal.
Doing so might offer Merkel a way of showing the German public the costs of helping Greece are being spread widely. But she may demand a higher price for such a politically risky move.
Berlin's wish list includes revising the rules of the Stability and Growth Pact that governs EU fiscal policy, greater powers of inspection for the Eurostat statistics authority, stricter punishment of countries that do not meet targets and even a possible expulsion clause as last resort.
It is unlikely all those demands will be met but Berlin has warmed to the idea of involving the IMF, while other EU officials have suggested the IMF could be involved in any aid package if it is led by Europe.
"I cannot ignore the fact that there are some reasons why the IMF should be included in the solution, but it should be done on the basis of European rules," said Jean-Claude Juncker, chairman of the Eurogroup.
A German government spokesman said that in an emergency "the financial assistance of the IMF is, for the chancellor and the government, definitely a point for discussion."
Speculation that the IMF could be involved in any aid package has also been fuelled by the fact that IMF Managing Director Dominique Strauss-Kahn met Barroso last week, although few details of their meeting have been released.
Financial Mirror, March 23, 2010 - Reuters
|||EU eyes aid deal that satisfies Merkel and Greece