–Deal Would Make Eurozone Contribution Optional, Sources Say

By Emma Charlton

BRUSSELS (MNI) – A weak compromise deal for aid to Greece,
combining funding from the International Monetary Fund with optional
bilateral loans from some Eurozone states, may be the best that can be
achieved at this week’s meeting of EU leaders in Brussels, senior EU
sources said Tuesday.

Debt-laden Greece is grappling to manage a budget deficit more than
four times the EU’s stipulated 3% limit and a sky-high cost of
refinancing in the market, leading many to speculate it will need
external assistance to service its debts. But European leaders are
divided over whether the support, if needed, should come from within the
Eurozone or from an international body, particularly the IMF.

Publicly the EU’s executive arm has urged the leaders, who will
meet in Brussels on Thursday and Friday, to agree to a bilateral loan
package for Greece. But privately, two well-informed EU sources said
that hopes of a Eurozone-only solution are fading fast in the face of
unyielding opposition from Germany’s Chancellor Angela Merkel.

If the leaders can be persuaded by Commission President Jose Manuel
Barroso and Council President Herman Van Rompuy to reach a deal at all
this week, one of the sources said, it is likely to be a combined
package of IMF and Eurozone aid.

A senior EU official said that solution had been designed so that
it wouldn’t require Eurozone members to contribute money if they didn’t
want to.

The negotiations are likely to be tense.

Barroso, speaking ahead of the summit, said: “I urge all member
states to agree as soon as possible on this [system of loans]. We cannot
prolong any further the current situation.”

Meanwhile, Germany’s Merkel has said repeatedly that the issue of
an aid package for Greece isn’t on the meeting agenda, and Eurogroup
chief Jean-Claude Juncker has said it isn’t necessary to achieve a deal
at this particular summit because Greece hasn’t even asked for aid.

“I say this very explicitly: In my opinion [help from] the IMF is a
subject that we need to consider and that we must continue to discuss,”
Merkel said.

Her flat refusal to consider German-funded aid, including a
statement that “a quick act of solidarity is definitely not the right
answer,” has forced Eurozone policymakers to return to the idea of
bringing in the International Monetary Fund — an option that they’d
totally discounted only two weeks ago.

Jean-Claude Juncker – until recently a vehement opponent of IMF
involvement – suddenly said this week that he thought a “twin track”
deal of combined IMF and Eurozone aid was feasible.

“My personal view is that it’s better to have a solution that does
not have an IMF component because the euro area needs to be able to
solve its own problems,” Juncker said Tuesday. “But I think mixing the
two instruments would not be a major scandal.”

He said any Eurozone aid would probably take the form of a
“bilateral system of coordinated aid,” but that not all countries would
contribute “because one or two members have precluded a Eurozone
approach.”

The European Central Bank strongly opposes IMF involvement. ECB
President Jean-Claude Trichet has said recourse to the Fund wouldn’t be
appropriate.

European Central Bank Governing Council member Vitor Constancio
went a step further on Tuesday, saying IMF involvement could damage the
euro and the credibility of the Eurozone.

“Going to the IMF, as a member of the euro area, could be
interpreted internationally as some sign of weakness of our framework…
and that would be detrimental to the euro,” Constancio, who has been
designated as the next ECB vice president, said.

“The role of the IMF is to be a catalyst…and that’s something
that Europe can do and should do,” he said.

Europe’s discord on the issue has confused the markets and pushed
the yield on 10-year Greek government bonds back to their February
highs, making it even more expensive for Greece to borrow in the debt
markets.

That intensifies the pressure on Greece’s Prime Minister George
Papaconstantinou, whose country must refinance around E20 billion of
debt maturing in the coming months.

Papaconstantinou has said he’s hopeful a deal can be struck at this
week’s summit, but he won’t rule out going to the IMF if necessary.

Whatever happens, someone’s set to lose face this week, with one
side adamant that a Eurozone solution is the only option and the other
refusing to participate.

What could emerge is a stitched-together solution somewhere in the
middle, or another vague statement to the effect that the Eurozone
stands ready to act if help is ever needed.

Non-Eurozone EU states, including the UK and Sweden, continue to
insist that Greece should go to the IMF. Now, with the position of other
countries softening on that issue, it’s too early to rule out an
IMF-only solution, one EU diplomat said.

The only thing that’s clear is that the single currency is facing
its tensest period yet, and – while not formally on the agenda – those
tensions will be center stage as EU leaders arrive for their 2-day
meeting on Thursday.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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