Greek austerity pressure rises

Greece's Parliament narrowly approved a law Wednesday that gives the government greater flexibility to privatize the country's public utilities as euro-zone finance ministers all but ruled out a proposal to reduce the amount of debt that Greece owes them.

The fractious vote over a privatization program that is already way off track underscored a widening rift within Greece's ruling coalition a week ahead of a critical vote on an austerity and reform package needed to secure bailout funds. On the same day, other euro-zone governments put further pressure on Greece to meet tough conditions in return for the new aid.

In a conference call on Wednesday, finance ministers agreed in principle to extend the repayment periods for the bailout loans Greece has received from the euro-zone and showed broad backing for a further cut in interest rates on these loans, according to two European officials.

They said an idea was also gaining traction for Greece to reduce its debts by offering to buy back bonds from private investors and central banks at a discount to their face value—though there remained questions about how such buybacks would be financed.

But a proposal from the International Monetary Fund for euro-zone governments to take losses—or "haircuts"—on the principal amounts of their loans to Greece emerged as a non-starter, the officials said. One official said the idea was "politically unpalatable" and "off the table." The IMF joined the call along with officials from the European Central Bank and European Commission.

In a statement issued after the call, the ministers urged Greece to sort out "remaining issues" before it can receive a €31.5 billion aid installment and didn't commit to a specific time frame for disbursing the aid.

Speaking after the call, German Finance Minister Wolfgang Schäuble said that reaching a decision on the aid by the Nov. 12 Eurogroup meeting was an "ambitious" target.

Mr. Schäuble said that while progress was being made on Greece, "a whole series of conditions have yet to be met," adding: "It is up to Greece."

The weight of Greece's debts was emphasized by a revised budget for next year submitted to parliament by the government Wednesday, which foresaw a darker outlook for growth. The budget, to be voted on by parliament next week, anticipates a 4.5% contraction in the economy for 2013, instead of 3.8% foreseen at the start of October.

The ratio of debt to annual economic output is seen rising to an onerous 189.1%, compared with an early October forecast of 179.3%, while the overall budget deficit next year is now expected to be 5.2% of annual output, against the previous target of 4.2%.

Official projections suggest that this debt burden will decline in coming years. According to the two officials, euro-zone governments are proposing that the target of reducing the debt to the supposedly sustainable level of 120% of economic output by 2020 should be pushed back to 2022. That is a sensitive issue for the IMF, which sees its credibility on the line and which must judge Greece's debt sustainable before it will sign off on the program.

The privatization law—which had been seen as procedural and was earlier expected to pass easily—won narrow majorities for most of its articles and by only a plurality on one of the key measures relating to the privatization program. However, many deputies from the coalition's junior partners, the Democratic Left and Socialist Pasok parties, didn't cast a vote, while others split their vote, supporting some parts of the bill but rejecting the rest.

In an effort to put an end to objections by his junior partners, Greek Prime Minister Antonis Samaras urged them Tuesday to back the austerity and reforms package or risk plunging the country into chaos. Mr. Samaras said that negotiations with a troika of inspectors from the European Commission, the IMF and ECB on those reforms had drawn to a close.

"The privatization vote passed narrowly, suggesting even more testing times ahead and a lot more water under the bridge to go. This is a huge test for the coalition," said David Lea, an analyst at Control Risks, a risk-consulting firm in London.

The debt buyback would be proposed to private-sector investors who currently hold bonds with a total face value of €63 billion ($81.6 billion) after an earlier debt restructuring. But it could also involve Greek government bonds held by euro-zone national central banks on their investment portfolios, those officials said. These holdings by national central banks are estimated at around €12 billion.

The finance ministers are scheduled to meet in Brussels on Nov. 12 to discuss Greece, while an interim Nov. 8 meeting is still likely, officials said.

After a period of relative calm, demonstrations and strikes are becoming more common. A 48-hour general strike has been called for next Tuesday and Wednesday.

(Published by WSJ - November 1, 2012)