Fears grow that Greece will need another loan

German finance minister warns of default risk as seven-year debt extension is proposed.

The eurozone’s finance ministers are coming under increasing pressure to agree to further financial assistance to Greece, with Wolfgang Schäuble, Germany’s finance minister, warning that the country is at “real risk” of default.

Schäuble has described the current €110 billion bail-out package as “insufficient” and said member states should agree to let Greece offer sovereign bondholders a seven-year extension of maturities.

In a letter sent on Monday (6 June) to the International Monetary Fund (IMF), the European Central Bank (ECB), the European Commission and eurozone leaders, Schäuble called for “a new programme for Greece in order to close the financing gap and prevent default”.

Economic analysts have suggested that Greece requires a further €25bn-€30bn over the next three years to meet its refinancing needs. Jean-Claude Juncker, who chairs meetings of the eurozone’s finance ministers, has already suggested that an extended bail-out package could be agreed if the Greek government implements additional austerity measures. The finance ministers are to meet in Luxembourg on 20 June.

In addition to extra money, Schäuble suggested that the finance ministers should agree to give Greece a “clear mandate” to begin the process of involving a “substantial contribution of bondholders to the support effort”. He said this could include offering sovereign bondholders a seven-year extension of maturities.

He added: “With a scheme as suggested above, there is a realistic chance to minimise the negative impact on financial markets while at the same time reaching the necessary burden-sharing between taxpayers and investors.”

The ECB has frequently voiced its opposition to involving private investors in a Greek rescue plan, saying that it would be a form of default that would have a negative impact on the rest of the eurozone.

The finance ministers of the 17 countries that use the euro are already scheduled to consider at the 20 June meeting whether to give Greece its next €12bn instalment under its current bail-out arrangements, following the conclusion of a report written by representatives of the European Commission, the IMF and the ECB, who have been assessing the state of Greece’s finances for several weeks.

‘Unorderly default’

In his letter, Schäuble warned that “we face the real risk of the first unorderly default within the eurozone” without another disbursement of funds before mid-July.

The troika’s findings were broadly positive and recommended that Greece should receive the next instalment of loans in early July. But this conclusion still has to be considered by the board of the IMF and the Commission, which will both then make recommendations to eurozone finance ministers before their meeting.

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The international team said that Greece had made “significant progress” in fiscal consolidation. It added, however, that “reinvigoration of fiscal and broader structural reforms” was necessary to reduce Greece’s deficit, improve the business climate and pave the way for sustainable economic recovery.

The Commission has stipulated that another condition of the next loan instalment is “broad cross-party support” in Greece, but the opposition centre-right New Democracy party has so far failed to support the government’s austerity measures.

In a sign that this is becoming the one remaining obstacle to progress, Antonis Samaras, the leader of New Democracy, held talks in Brussels with José Manuel Barroso, the president of the Commission, yesterday (8 June). Barroso used the meeting to urge Samaras to back the Greek government’s plan.