Europe's Big Debt Drama Enters Finale as Clock Ticks for Greece

(Bloomberg) -- Europe may be about to let Greece out of the financial doghouse, yet the wrangling is set to escalate over the terms and conditions.

Finance ministers from the euro region meet in Sofia on Friday for talks on easing repayment terms on Greek bailout loans. While Germany is indicating it may take less of a hard line, there are persistent differences among nations and the International Monetary Fund over how much leeway to give and how much supervision should continue.

Follow the latest developments on the finance ministers’ meeting in Sofia

All sides need to reach an agreement in June before Greece’s financial lifeline expires at the end of the summer and Europe’s most indebted country relies once more on the bond market for money.

Talks in the Bulgarian capital will focus on the so-called growth adjustment mechanism that would ultimately link debt repayments to economic performance. Greece could pay more in better times, and less in worse.

“We still have a final mile to go but there is a positive sentiment around the table,” Portuguese Finance Minister Mario Centeno, who chairs the summits, said in an interview last week. “The positions today are much closer than they used to be.”

Europe's Big Debt Drama Enters Finale as Clock Ticks for Greece

Almost six years after Greece was promised additional relief on some of its 320 billion euros ($384 billion) of outstanding debt, it’s still unclear how the finale to one of Europe’s biggest ever financial meltdowns will play out.

The country is still feeling the repercussions, with the economy recouping only a fraction of what it lost and austerity measures continuing to bite. But with elections due next year, the government in Athens is desperate to avoid another rescue program.

A key source of disagreement over the way forward is whether the growth adjustment mechanism should be triggered automatically or after approval by euro members. The IMF, European Commission and countries such as France say it should be automatic. Germany wants it to be conditional on a review to ensure that Greece doesn’t stray.

Europe's Big Debt Drama Enters Finale as Clock Ticks for Greece

That said, the German Finance Ministry is more amenable to changing tone on Greece than in recent years. It’s open to the idea of debt relief as long as the country agrees to continuing scrutiny after the current bailout program ends, according to a Finance Ministry document obtained by Bloomberg.

Another key area of contention is over which Greek loans will be covered. At the moment, any potential re-profiling would involve outstanding loans given as part of the country’s second bailout from the now-defunct European Financial Stability Facility.

The IMF would like the restructuring to also be extended to bilateral loans Athens got from other euro-area countries in its first bailout and to money from the European Stability Mechanism, the euro-area bailout fund, according to people familiar with the talks.

Crucially, a restructuring of bilateral loans would have budgetary implications for euro-area countries, which have ruled out anything that remotely resembles a fiscal transfer to Athens.

Then there’s Greece’s budget. Countries including Germany want Greece to maintain an agreed primary surplus -- that’s net spending before interest payments -- of 3.5 percent of gross domestic product until 2022 and about 2 percent from then onward to help repay debt.

The IMF doubts that Greece can maintain a surplus higher than 1.5 percent over the medium term and therefore needs debt relief, though Greece exceeded its budget targets in recent years.

Europe's Big Debt Drama Enters Finale as Clock Ticks for Greece

Other measures under consideration include repaying more expensive IMF loans with cheaper European ones and for central banks in the euro region to hand over their profit from holdings of Greek government bonds to Athens.

Before any firm decisions, Greece still has to implement dozens of economic overhauls tied with the last review of its current program, including selling state assets and reforms to the energy industry. The IMF said that will pave the way for the country’s to stand on its own feet again.

"If Greece implements the program as agreed and if there is a satisfactory agreement on debt, then I have little doubt that Greece will be able to return to market," Poul Thomsen, director of the IMF’s European Department, said in Washington last week.

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