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Monday, February 20, 2012

Another uncertain meeting...

Ahead of another meeting of eurozone finance ministers there are still plenty of issues which need to be resolved if Greece is to get underway with its second bailout plan. The key issues are:
- There remains at least a €6bn gap in the Greek funding plan and Germany, the Netherlands and Finland have set a ceiling of €130bn on the size of the second Greek bailout. The meeting must find a way to fill this gap – reports suggest it will be done through a combination of a write down on the Greek debt held by national central banks and a reduction in the interest rates charged on the initial Greek bailout, while discussions are on-going over the redistribution of profits from the ECB’s holdings of Greek debt (which as we point out here is nearly impossible).
- Currently the debt sustainability analysis shows Greek debt at 129% of GDP in 2020, above the target of 120%. This may be in addition to the funding gap mentioned above (although this isn’t clear).
- Will the eurozone accept and approve the lower IMF contribution? Reported to be only 10% this time around, compared to 30% in previous bailouts (also raises questions over the IMF’s support for the programme more generally).
- Following the Greek restructuring, Greece will be declared as in ‘selective default’ by the rating agencies. Any Greek bonds will not be eligible as collateral to gain loans at the ECB. This essentially means Greek banks will be stripped of assets which they use to gain the ECB funding upon which they are completely reliant. The plan suggests providing them with €35bn in assets, although outside of the bailout funding. Where will this money come from? Likely to take the form of EFSF bonds, although the creation of these bonds will still need to be approved by the eurozone in the same manner as if it were lending cash directly.
As we outlined in a recent briefing, eurozone leaders will struggle to find an agreement on these issues (along with many others).

We’ll update this blog with any big news throughout the day.

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