Greece ‘nearing new aid package’

Greece has agreed in principle a new bail-out package with its European partners in Vienna, according to a source cited by the Reuters agency.

The new three-year plan will supersede Greece’s existing 110bn euro ($159bn, £97bn) EU and International Monetary Fund bail-out, Reuters said.

Greece would target another 6.4bn euros in austerity measures and finally start its 50bn euro privatisation programme.

In return the country would be offered some form of reduction in its debts.

The broad terms of the package were agreed at a meeting of eurozone deputy finance ministers in Vienna that went on until after midnight on Thursday night.

Although the size of the new package was not revealed, the Reuters source said it would cover Greece’s borrowing needs for this year and next.

Details of the new plan still need to be finalised, so that it can be signed off by the “Eurogroup” of eurozone finance ministers when they meet on 20 June.

The blessing of the IMF and the European Central Bank is also likely to be needed.

The Greek prime minister, George Papandreou, will present the government’s privatisation plans and its new austerity measures to the Eurogroup chairman, Jean-Claude Juncker, in Luxembourg on Friday.

The additional spending cuts and tax rises would come at time when the government already faces daily demonstrations by thousands of protesters against its existing plans.

On Friday, protesters from the pro-Communist PAME union blocked access to the finance ministry in Athens, and hung a banner from it calling for a general strike.

The previous night, about 20 protesters hurled stones and yoghurt at government spokesman George Petalotis as he was stepping up to the podium at an event for the ruling PASOK party.

The original bail-out plan has been overtaken by events, leaving the Greeks desperately short of money again.

The plan had envisaged Greece returning to the financial markets to help fund its deficit from next year.

But with its two-year borrowing cost currently at about 25%-per-year, the market is effectively closed to Athens.

Earlier this week, ratings agency Moody’s cut its rating of Greece to one of the worst levels available, on a par with Cuba, and only slightly above recently-defaulted Ecuador.

Moreover, Greece has failed to bring down its deficit as quickly as planned, largely because its economy has remained mired in recession.

Last week, the IMF threatened to veto the release of the latest 12bn euro tranche of Greece’s existing rescue package because the country could not guarantee its solvency over the next 12 months.

The “troika” of EU, IMF and ECB negotiators is due to announce a decision on the the fifth tranche later on Friday.

The government faces 13.7bn euros of immediate cash needs.

The new bail-out agreement is likely to include a “soft restructuring” or “reprofiling” of Athens’ private sector debts, advocated by Mr Juncker as a way of making the nation’s debt burden more manageable.

Until now the idea has been fiercely resisted by the European Central Bank, which fears that by imposing losses on Greece’s lenders – including overstretched European banks – the move could spark a broader eurozone financial crisis.

But it appears that an agreement has now been reached to grant Greece debt relief, so long as it is done in a way that does not trigger a “credit event”, according to the Greek government source quoted by Reuters.

This “credit event” could refer to the risk of triggering payments under derivative contracts used by financial markets to hedge or speculate on the risk of a Greek default.

It could also refer to methodologies used by the credit rating agencies and by the banks to determine whether loans are in default.

Many European banks have not yet recorded any losses on most of their lending to Greece, and could find their own solvency is put at risk if they are forced to do so.

It is likely that the restructuring would involve the postponement of debt repayments due in the next two years, as well as a possible reduction in interest payments.

It would also have to be done with the agreement of Greece’s private sector creditors.

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