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5th Mar 2024

Germany and Italy 'confident' on Greek bail-out

  • Change of heart: Angela Merkel is expected to approve the Greek bail-out after all (Photo: consilium.europa.eu)

Berlin on Friday indicated it will give a green light to the second bail-out deal for Greece, backing down on the idea of postponing parts of the agreement until after Greek elections take place in April.

German Chancellor Angela Merkel, Italian Prime Minister Mario Monti and Greek premier Lucas Papademos held a joint phone call on Friday (17 February) in which they said they were "confident" a long-postponed deal to help Greece avoid bankruptcy will be sealed off at a meeting of eurozone finance ministers on Monday, Monti's office said in a statement.

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The "detailed" and "constructive" phone call took place after Merkel cancelled her planned visit to Rome Friday following the resignation of the German president.

EU officials in Brussels also said that the "pieces are falling into place" ahead of the Monday meeting, with Germany and its triple A rated allies - Finland, Netherlands and Luxembourg - backing off from the idea of a partial deal to keep pressure on Athens after the elections.

"They realise the two-phased approach would compromise the whole operation," one EU source told this website, as the Greek government has only ten days left to auction new bonds as part of the so-called private sector involvement (PSI) aimed at relieving Athens of some €100bn worth of debt.

Another source said that private bondholders will be discouraged from carrying out the bond swap if governments do not sign up on Monday to their share of the bail-out (€130bn). A number of safeguards will be put in place, however, to ensure that the bail-out money is used primarily to bring down the country's foreign debt.

The Franco-German idea of a special account sealed off from the Greek government will be "part of the deal", both sources said - a reflection of the lack of trust in the local politicians. The escrow account will also be funded by Greek tax revenues "when their tax collection will start working properly" so as to pay off the country's debt.

But even with the total aid of €230bn, a gap of several billion euros is emerging. According to a new debt sustainability assessment drawn up by the troika earlier this week, the bail-out will meet the target of reducing Greece's debt to 120 percent of GDP by 2020, but only to 129 percent.

That is where the European Central Bank and national central banks holding Greek bonds are expected to jump in. The same assessment suggests that if the ECB was re-distribute the profits on Greek bonds to central banks and if these then decided to give them back to Greece, debt would be cut for another 5.5 percent of GDP. The rest could come by a restructuring of Greek bonds held by the central banks themselves. But all of these elements still depend on the results of the PSI, sources say.

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