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Europe fails to seal Greek debt deal

James Neuger and Sandrine Rastello Brussels

European finance ministers failed to agree on a debt-reduction package for Greece after battling with the International Monetary Fund (IMF) over how to nurse the recession-wracked country back to fiscal health.

Christine Lagarde, managing director of the International Monetary Fund (IMF), speaks during a news conference in Kuala Lumpur, Malaysia, on Wednesday, Nov. 14, 2012. Lagarde today kicked off a three-country tour of Southeast Asia, which is thriving after emerging from turmoil more than a decade ago. Photographer: Goh Seng Chong/Bloomberg *** Local Caption *** Christine Lagarde. Credit: Bloomberg

With creditors led by Germany refusing to put up fresh money or offer debt relief, the finance chiefs were unable to scrape together enough funds from other sources to help alleviate Greece’s debt burden, set to hit 190 percent of gross domestic product (GDP) in 2014.

The euro weakened, Greek bonds fell and stocks declined after more than 11 hours of talks broke up early yesterday in Brussels. The next aid payment to Greece, held up since June, remained frozen until at least another emergency ministers’ meeting on Sunday.

“We have a series of options on the table on how to close the financing gap,” German Finance Minister Wolfgang Schaeuble said. “We discussed the issue very intensively, but since the questions are so complicated we didn’t come to a final agreement.”

Greece’s fiscal woes have defied three years of rescue efforts, rekindling doubts about Europe’s crisis-containment strategy and maintaining a cloud over the euro, postwar Europe’s signature economic accomplishment.

News of the deadlock – unexpected after a prediction last week of a “definitive decision” by the meeting’s chairman, Luxembourg Prime Minister Jean-Claude Juncker – pushed the euro down 0.4 percent to $1.2765 (R11.2985) as of 9.19am in Brussels. The yield on Greek 10-year notes rose 3 basis points to 17.13 percent and the Euro Stoxx 50 index fell 0.5 percent.

Finance ministers failed to tackle the dual task of steering an extra e32.6 billion (R288.5bn) to Greece through 2016 while finding a way to tame the resulting increase in Greek debt, already the highest in Europe and deemed “unsustainable” by the IMF.

“Further technical work on some elements of this package” was needed, Juncker said in a statement. He stopped short of predicting a deal at the next meeting, which will come after an EU budget summit starting today that risks further inflaming tensions between the richer north and poorer south.

A bloc of top-rated creditors led by Germany continues to resist debt forgiveness, telling their taxpayers that the Athens government will pay back in full the e240bn in loans doled out or promised in two rescue packages since 2010.

German Chancellor Angela Merkel, gearing up to campaign for a third term next year, has ruled out writing off a portion of Greece’s debt. Politicians in the Netherlands and Finland, also with AAA credit ratings, have told their bailout-weary voters the same thing.

Still, the creditors considered a milder form of debt reduction with options including cuts in interest rates on loans to Greece, a temporary suspension of interest payments and a longer repayment schedule.

Greek Prime Minister Antonis Samaras’s fragile coalition earned the concessions by passing another austerity budget, enacting reforms to make the economy more competitive.

After three years of faulting Greece for failing to deliver on economic promises, the ministers commended the government’s “considerable efforts”. While the praise indicated that Greece qualifies for the release of a e31.5bn aid tranche on hold since June, the statement gave no timing for the disbursement.

With unemployment at 25.1 percent, Greece also enjoyed the sympathy of leaders including Merkel, the dominant figure in Europe’s bailout politics, who has gone from threatening to kick the country out of the euro a year ago to praising its turnaround efforts.

The clash with the IMF was triggered by the ministers’ decision last week to grant Greece two extra years, to 2016, to cut the deficit to 2 percent of GDP. While designed to address Greece’s growth problem, it forced the country to take on extra debt to plug the deficits.

IMF bylaws bar it from lending to countries with “unsustainable” debts. IMF managing director Christine Lagarde said: “We made some good work and we’re closing the gap but we’re not quite there yet, so it’s progress but we have to do a bit more.” – Bloomberg

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