There were encouraging words for Greece from Germany Sunday ahead of a challenging week of negotiations with representatives of the European Commission, the European Central Bank and the International Monetary Fund on a possible new bailout as well as banking representatives over a haircut for holders of Greek debt.
Following talks with Prime Minister Lucas Papademos in Athens, German Foreign Minister Guido Westerwelle expressed confidence that the negotiations with Greek bondholders, also known as PSI, would reach a positive conclusion despite no deal being reached last week.
?Discussions are difficult but with good faith they will reach a good result,? said Westerwelle, who also met his counterpart Stavros Dimas and New Democracy leader Antonis Samaras.
Earlier, German Chancellor Angela Merkel said spending cuts alone were not enough for Greece and that structural reforms were needed although they would take time to bear fruit.
She said there were many examples ?where the IMF has arranged similar programs where, after a certain phase of recession, come very strong phases of growth.? ?Progress has been made in Greece,? Merkel said, adding that tax collection was still a problem.
Germany?s backing comes as Greece enters a crucial week of talks. The technical team of the EC, ECB and IMF, or troika, is due to arrive in Athens on Monday. Top troika officials are expected to come later in the week but this will depend on the assessment of their colleagues.
A number of thorny issues remain open, including possible cuts to private sector wages and supplementary pensions. The government will also have to show how it will make up a shortfall of some 1.3 billion euros in revenues from 2011.
Talks with Charles Dallara, the head of the Institute of International Finance, a global banking body representing private bondholders, are expected to resume on Wednesday. Speaking to the Financial Times on Sunday, Dallara suggested that demands from outside Greece about the size of the haircut and the interest rate of the new bonds were hampering discussions.
?All the European heads of state said [at an October summit] they wanted a deal with a 50 per cent [haircut] and a voluntary agreement,? Dallara said. ?Some of their own collaborators are not following that decision. Those who would expect private investors to take unreasonable losses on the coupon don?t understand the nature of a voluntary deal.?