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Fallout from Greek austerity deal begins, Germany suggests IOUs

Published:Wednesday | July 15, 2015 | 11:32 AMAP

The German government is arguing that one possible way to help Greece meet its financial obligations in coming days, before a full bailout programme is established, is for the country to issue IOUs for domestic needs.

Finance Ministry spokesman Martin Jaeger said Wednesday that "we have included this element in the discussion" among eurozone nations on how to keep Greece afloat while talks proceed on the details of a full bailout deal. The talks are expected to last weeks.

Jaeger says that IOUs are just one of "various conceivable approaches."

Greece needs short-term financing among other things to repay a loan to the European Central Bank due next week and to clear arrears with the International Monetary Fund.

Germany says eurozone leaders were aware of the IMF's analysis of Greece's debt situation when they drew up a preliminary bailout package and that, while Berlin takes the IMF's conclusions seriously, its position isn't new. The IMF has said Greek’s debt could rise to 200 per cent of GDP in two years.

The IMF said Tuesday that the Greek debt could rise to 200 per cent of GDP in two years and that Greece needs debt relief going "far beyond what Europe has been willing to consider so far."

Germany says an outright debt cut would be illegal under European law and argues that there's only limited room for manoeuvre on lesser forms of debt relief. Finance Ministry spokesman Martin Jaeger says that the European approach of making countries' debt sustainable by getting budgets in shape has worked well elsewhere.

He says Germany still believes that approach can work in Greece with the help of economic reforms and a privatisation fund.

The European Commission says there are "serious concerns" about the sustainability of Greece's debt load amid a worsening in its economy.

The Commission says in a report that its main forecasts are for debt to reach 165 per cent of GDP in 2020, 150 per cent in 2022 and 111 per cent in 2030.

In an 'adverse' scenario, in which the economy does worse than expected, the debt load would hit a massive 187 per cent, 176 per cent and 142 per cent, respectively.

The left-wing government of Prime Minister Alexis Tsipras took office in January. The Commission says that since the end of last year, there was a "very significant weakening of commitment to reforms and backtracking on previous reforms" which quickly led to a "significant deterioration of debt sustainability."

The Commission has cut its growth estimates and expects up to a 4 per cent contraction in Greece's economy this year, compared with a 0.5 per cent rise predicted early this year.

Greece's Alternate Finance Minister Nadia Valavani has resigned from government in protest over the austerity measures the country is asked to implement in exchange for a bailout.

Arriving in Parliament, Valavani said she was not going to vote in favour of the agreement, and that this meant she could not stay on as part of the government.

Earlier, Greece's finance ministry released a letter she had sent to the prime minister on Monday morning, saying that if he returned from Brussels having made commitments for harsh austerity measures she would be unable to continue as a member of the government.

Prime Minister Alexis Tsipras agreed to a deal Monday morning under which Greece must pass through parliament harsh austerity measures his left-wing government had long battled against in return for the start of negotiations on a third bailout of about €85 billion.

The European Commission is proposing to give Greece €7 billion in loans from a special fund overseen by all 28 EU nations so it can meet debts due in coming days.

The loan would be made pending the start of a full bailout programme agreed on between the 19 eurozone leaders on Monday.

Since Greece needs to meet debt payments as soon as next week, eurozone nations have been looking for a way to give it a first, quick loan. They are considering tapping a fund, the EFSM, which is backed by all 28 countries in the EU. The problem is that non-euro nation Britain does not want to help pay for Greece, which it considers a eurozone issue.

EU Commissioner Valdis Dombrovskis says that dipping into the EFSM "is not an easy option" but says there are no other obvious options. Once the full bailout package is operational, the initial loan could be repaid with money from the new programme. Domvrovskis adds that the Commission is looking for guarantees to protect non-euro nations on such a loan.