The euro crisis

(Updates at end of this post)

AFTER weeks of angry words, tear gas and smoke, there is an air of agreement over the salvage of Greece. European finance ministers gathered in Brussels tonight sounding hopeful that an accord over a second Greek bail-out, worth €130 billion ($170 billion), was at hand.

“Today we have all the elements we need to reach a deal. It's like a puzzle. All the pieces are on the table; what's needed now is to put them together,” said François Baroin, the French finance minister. Even Germany’s Herr Nein, Wolfgang Schäuble, said he was confident of a deal, saying ministers were “aiming to finalise the decision on a new rescue package for Greece”.

Another symbolic bit of good news came from the European Central Bank (ECB), which announced today that it had made not made any purchases last week under its bond-buying programme. This is the first time the ECB has not resorted to this emergency measure since August, when it acted to stop Italy and Spain from being sucked down the drain.

So is the debt crisis finally on its way to resolution? Not so fast. The Dutch finance minister, Jan Kees de Jager, poured so much cold water on his colleagues' optimistic comments that the euro dropped immediately. On his way into the meeting, he said:

Greece wants the money and so far we haven’t given them anything. We have said no over the past weeks. We can afford to say to no until Greece has met all the demands. It’s up to Greece and the troika to say whether this has been done and for us it is a no until Greece has done so.

Tough talk. But it is hard to imagine the Dutch wrecking a deal on their own if the Germans have decided to grant the second bail-out. Does the Netherlands really want to provoke another round of the crisis now that its economy is in recession? Indeed, Dutch sources whisper that the minister's words have been overplayed.  More likely, Mr de Jager is living up to his reputation as the hard man of the Eurogroup, whose job is to stiffen Germany’s resolve.

The real issue for the finance ministers is to try to fit the ever-deteriorating Greek numbers within two self-imposed conditions. One is that the restructuring of Greece’s debt should reduce its burden down to “about 120% of GDP” by 2020. The other is that that the contribution of governments to the second package should be €130 billion (including some funds left over from the first €110 billion bail-out) after the "voluntary" losses being negotiated with Greece's private creditors*. Both are somewhat artificial figures. The debt ratio of 120% was chosen because it is the level of Italy's debt; the contribution of €130 billion was decided in October, so cannot be changed for fear of giving the impression that Greece is a "bottomless pit".

But as matters stand at the start of the meeting, the package would leave Greece with a debt burden of 129% of GDP – too high for many of the creditors. Tonight's homework for the ministers will be to fill the remaining fiscal hole: by convincing the ECB to forego profits on the bonds it bought at a discount (it has more or less agreed to do so) and perhaps by reducing the interest rate that Greece is charged by its creditors.

For lovers of numbers, the details of the options are reported in some detail in the FT (here), the Wall Street Journal (here) and Reuters (here).

But even if a deal is agreed tonight, big questions remain. How long will it be before Greece must come back for still more money? And if it must be kept permanently under threat of default, what is the chance of restoring the confidence needed to help Greece recover? For now, the ministers seem ready to play for time, in the hope that Italy and Spain can be stabilised. They will no doubt express confidence that the Greek problem has been settled once and for all. But sooner or later, they will be back for more crisis talks.

* insert

Update 22:00 - The word is that it's going to be a long night. The finance ministers are busy with another round of negotiations with Greece's private creditors to squeeze a bigger "voluntary" contribution, beyond the 70% loss negotiated so far.

Update 22:20 - The scale of uncertainty about the prospects for Greece are highlighted in the IMF's debt sustainability assessment, which concludes that, if Greece does not carry out structural reforms, its debt ratio could reach 160% of GDP in 2020. From Reuters:

... a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatisation implementation). This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it

Update 02:30 - A more detailed account of the IMF's debt sustainability report is here, from the FT's Peter Spiegel. Diplomats claim the leak is having little impact on the negotiations. But it will have a big impact on the journalists' interpretation of the deal of the credibility off the deal - if and when it is reached.