Euro zone ponders delay of second Greek bailout

 Euro zone finance officials are examining ways of delaying parts or even all of the second bailout programme for Greece while still avoiding a disorderly default, several EU sources said on Wednesday.

Delays could possibly last until after the country holds elections expected in April, they said. While most of the elements of the package, which will total 130 billion euros, are in place, euro zone finance ministers are not satisfied that Greece’s political leaders are sufficiently committed to the deal, which requires Athens to make further spending cuts and introduce deeply unpopular labor reforms.

It is also not clear that Greece’s debt-to-GDP ratio, which currently stands at around 160 percent, will be cut to 120 per cent by 2020 via the agreement, as demanded by the 'troika' of the European Commission, IMF and European Central Bank.

“There are proposals to delay the Greek package or to split it, so that an immediate default is avoided, but not everything is committed to,” one official briefed on preparations for a euro zone finance ministers call later in the day told Reuters. Germany, Finland and the Netherlands are the countries pushing to delay the package, two other officials said, with Germany the most adamant and suggesting that final approval should only be granted after new elections are held.

Under the proposal, a debt swap agreement between Greece and private sector holders of Greek bonds, which aims to cut Athens’ debt burden by 100 billion euros via the private sector taking a nominal 50 per cent loss, could go ahead in the coming weeks, with the process beginning in around a week's time.

If successfully completed, the swap would allow Greece to avoid missing a 14.5 billion euro bond redemption payment on March 20. If Athens misses that payment, or the terms of the payment are not altered, it will be in default.

Around 30 billion euros of the 130 billion euro package is made up of “sweetners” to be paid to private-sector investors to encourage them to take part in the swap.

That portion of the package would have to be raised and paid out, and there would also need to be support of around 30 billion euros to recapitalize Greek banks, but the bulk of the funds would not be signed off on. Data from Athens on Tuesday showed the economy shrank 7.0 per cent in the fourth quarter of 2011 on an annualised basis, making it all the harder for Greece to meet the target. One official estimated that Greece's debt-to-GDP ratio may only fall to 140 per cent by 2020 given the latest figures.

One major problem with splitting the bailout package is whether private holders of Greek bonds would be willing to sign up to a swap if Greece’s financing - which makes up the bulk of the second package - is not in place, since that would mean the state might not be able to meet future bond payments.

As a result, one euro zone source said it was possible that the entire second package - the private sector portion and the remainder - could be delayed until after Greek elections.