EU official: Greece needs extra $20 billion

GABRIELE STEINHAUSER AP Business Writer Published:

BRUSSELS (AP) -- Greece's international debt inspectors have discovered that the debt-ridden country still needs an extra €15 billion ($20 billion) in help -- on top of a promised €130 billion bailout and a €100 billion debt relief from private investors, a European official said Thursday.

The European Commission, the executive arm of the European Union, has asked the rest of the 17-country eurozone to help foot the bill for the missing €15 billion, the official said, indicating that a limit has been reached of what can be achieved by Athens implementing further spending cuts and private investors taking losses on their Greek bonds.

The gap could be filled either through more help from the other euro countries or by national central banks and state-owned banks like France's Caisse de Depots taking a cut on their Greek bond holdings, the official said. He was speaking on condition of anonymity because of the sensitivity of the matter.

The new push for Greece's public and government creditors to take a cut on their investments -- dubbed the official sector involvement, or OSI -- is a new front in the battle to save the country from a potentially devastating default. So far the eurozone and the International Monetary Fund have given billions in bailout loans to the struggling country, but they haven't been asked to take losses.

It is also an acknowledgment that Greece's economy is in such a dire state that the country's debt inspectors -- the so-called troika of the Commission, the European Central Bank and the IMF -- are having a hard time finding more ways in which Athens can save money.

Greece has been at the heart of Europe's debt crisis since it revealed in 2009 that its debt was far larger than its official estimates. It piled on the debt during a decade in which the government overspent and the economy remained stagnant.

The challenge now is reducing the debt at a time when the economy is shrinking. Spending cuts, tax increases and the general uncertainty of the crisis have already pushed Greece into a deep recession, which in turn has eliminated many of the gains from the austerity measures.

Asking private creditors like banks and investment funds to share the burden of saving Greece was the first reaction to this problem; getting the public sector creditors involved is the next.

The official said a deal with private creditors to take losses on their holdings will have to be announced before the end of the week to make sure it can be implemented before Athens has to pay back €14.5 billion in bonds on March 20.

Experts from national finance ministries will examine the details of the deal on the so-called private sector involvement -- or PSI -- on Friday, and will likely also discuss how the €15 billion gap can be closed, the official said.

People familiar with the tentative deal have said it would see investors take losses of more than 70 percent of their holdings. On top of having to accept a 50 percent cut in the face value of their bonds, investors will also receive lower interest rates of between 3.5 per cent and 4.5 per cent and give Greece 30 years to pay back the debt.

If agreed, the deal would end negotiations with bondholders that started this summer and have become increasingly tenuous in recent weeks.

Getting public creditors like central banks or sovereign wealth funds to take a hit may be even more controversial, since any losses or foregone profits ultimately come out of taxpayers' pockets. A spokesman for the German finance ministry, which is seen as one of the biggest opponents of OSI, declined to comment on the financing gap Thursday.

Analysts estimate that the European Central Bank holds €50 billion to €55 billion in Greek bonds by face value. The majority of these were bought at a discount by the ECB in the summer of 2010, when the central bank was trying to stabilize their prices.

Legally, it can't simply write them down without falling afoul of the EU treaty, which forbids the bank from financing governments. Writing off a debt would be, in effect, a financial transfer directly to a government.

But the ECB could find a way to give up the substantial profit it would earn by holding the bonds to maturity. It could do that by selling the bonds to the eurozone bailout fund or to Greece at the knockdown prices it bought them for.

However, the ECB has so far given no indication that it is willing to do so, with some of its governing board members saying that giving up on profits would clash with the bank's ban on funding national governments.

Alternatively, eurozone states could boost their bailout loans beyond the promised €130 billion, or provide some, more-limited, relief by further lowering interest rates on these loans.

Analyst Carsten Brzeski at ING in Brussels said the ECB and President Mario Draghi might be open to giving up the profits on the bonds. But the bank will wait to take action so it does not appear to be acting at the request of politicians.

The bank is legally independent and the EU treaty forbids it to take instructions from government officials.

"I think Draghi could live with it, but they will not bow very easily," said Brzeski. "It has to look like it is their own idea, their own initiative."

While officials have stressed the need for Greece's financing to be set before the bailout goes through, the main players have been flexible before and "it's not as hardball as it looks."

On the official side, "someone will have to bite the bullet, or everyone," he said. European officials are trying "to have everyone take part in the burden sharing and thereby get the ECB involved."

The €130 billion second bailout package also still depends on labor market reforms that the EU and IMF are asking Greece to implement. Unions and employers resumed talks on Thursday over troika demands to lower wage costs in the private sector and possibly lower the minimum wage.


AP Business Writer David McHugh contributed from Frankfurt.