Why EU finance ministers can’t complete 2nd level of Greek aid

Here is a brief overview of the reasons why the European Union finance ministers will have a hard time  agreeing on a second round of financial aid for the Greek bailout:

• Berlin’s desire for privatization as part of the the bailout package has greatly complicated the situation.

Greece passed its multi-year privatization plan for 2011-2015 on June 30th. It was a precondition imposed by its lenders in order to grant further financial assistance.

The IMF, ECB and European Commission estimate the amount of financial aid Greece needs to be approximately 172 billion EUR over the next three years. 57 billion – including 12 billion which were released last week – are covered by the previous plan from 2010. However, 115 billion remains to be accounted for.

If the Greek privatization plan brings in 35 billion by 2014, as planned, the bill for the euro zone and the IMF would still stand at around 80 billion, an amount that the European Financial Stability Facility (EFSF) could cover.

• Bundestag veto

The problem stems from the German insistence, supported by the Dutch and the Finns, to involve private banks in a new aid plan. After giving the green light to three successive aid programs (Greece, Ireland, Portugal), the Bundestag has vetoed any further assistance that would involve only taxpayers. Germany is also insisting that private creditors be involved in the effort to stabilize euro zone states. Negotiations have already begun with German representatives, who have admitted that they are willing to compromise. Otherwise, a new stock market crash could become a reality.

Beyond the issue of involving the private sector, no solution has yet been found which would avoid ranking, at least temporarily, a part of the Greek debt to “default” by rating agencies such as Moody’s. Although the ECB is opposed to this move for fear of contagion throughout the euro zone, several EU states believe that they can afford a “selective default” as part of an overall rescue plan, leaving Greece time to recover. They are seeking the best possible public-private agreement: purchase of downgraded Greek bonds to reduce the size of the debt, longer term and lower interest rate loans from the EFSF, and orderly participation from the private sector with a debt rollover.

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