IMF’s Borges says Greece bailout will change

The size of Greece’s second bailout and private sector involvement in it will change, because the assumptions on which the original deal was based are no longer valid, the head of the IMF’s European department Antonio Borges said on Wednesday.

European leaders agreed on July 21 to provide a new, 109 billion euro ($145 billion) financing package to Athens and accepted a voluntary offer from private investors to take a 21 percent loss on their holdings of Greek bonds.

“The Europeans have chosen in July to provide very good terms for the banking sector and to fund Greece as much as was needed to compensate for that,» Borges said.

“Since then, because the situation has become somewhat different, particularly concerning interest rates in Europe, the programme will necessarily have to be revised,» Borges told a news conference.

“How it will be revised is for the Europeans to decide and we can certainly live with whatever choice the Europeans will make,» he said.

The loss to be taken by banks, or haircut, was part of a complex debt restructuring agreement with four options for banks to choose from, involving a bond swap and roll over into new Greek paper of different maturities.

But the second bailout was based on assumptions that Greece would return to growth in 2012 with a 0.6 percent economic expansion, meet certain deficit and privatisation targets and implement various reforms.

Because many of these parameters have changed since July, the second bailout would need to change as well.

“The figures listed in the summer were on the basis of assumptions which very quickly became outdated, especially … as you know Greece has been in a deeper recession than people thought,» Borges told a news conference.

“That changes everything — changes the budget figures, the prospects for growth, changes everything else, so this by itself will lead to a different programme,» he said.

The terms of banks’ involvement in the Greek financing package would therefore have to change too. «We in the IMF could operate easily on the basis of a bigger or smaller haircut on the credit of international investors — this is very much an issue for the Europeans to decide,» he said.

Borges said that if euro zone countries decided to increase the haircut, they would need to contribute less to the financing package, while a smaller loss for banks would mean bigger outlays for taxpayers.

But he noted that European Central Bank President Jean-Claude Trichet was opposed to big losses for investors.

“If the Europeans say: ‘we want a smaller haircut because we are very concerned about confidence throughout Europe’ — this is in particular the position of the President of the European Central Bank, who is very concerned about confidence in the financial sector and recommends against any kind of substantial haircut — if the Europeans say that and in parallel they say that as long as Greece does what it does, it will have all the financing it needs at generous conditions, we can very well live with that,» Borges said.

“That’s actually a very safe scenario if you want.”

Borges cautioned, however, a Greek haircut was not the solution to the country’s problems.

“Let’s keep in mind one thing — a big haircut, no matter how big, will not solve Greece’s problems because Greece will always have to rely on the markets to finance itself over the next few years, therefore the (reform) adjustment is still necessary,» he said.


Subscribe to our Newsletters

Enter your information below to receive our weekly newsletters with the latest insights, opinion pieces and current events straight to your inbox.

By signing up you are agreeing to our Terms of Service and Privacy Policy.