Speculation is high that European finance ministers will come to an agreement later this afternoon, releasing $40-plus billion in aid to Greece. But, there still lies the potential for leaders to delay the decision once again, which would be considered bearish for the EU and the Euro. Here are two key themes at play.
It would be easier if European finance ministers were left to their own decision making. However, with the IMF fitting the bill for about one-fifth of the overall 246 billion euro rescue, demands for the global organization need to be heeded. In particular, International Monetary Fund officials are pushing for guarantees that the Greek nation will be able to meet debt reduction targets by 2020. Expectations are for Greece to reduce its debt to GDP ratio to 120% of GDP by the target year, which currently stands at approximately 170%.
However, the issue has been a hot point for IMF Managing Director Christine Lagarde, who remains staunchly against the 2-year extension that European leaders granted Greece almost two weeks ago – allowing the debt target to be reached by 2022. The exclusion of guarantees of lower debt to GDP ratios could force the IMF to pull out of the arrangement, leaving European leaders left holding the bag.
No Debt Relief
Part of the current plan for Greece includes debt relief in the form of lower interest rates and potential writeoffs on already disbursed aid. However, higher rated countries like Germany and Finland remain against the idea. Although the plan is being supported by some as the only option to reduce debt costs on Greece, leaders of both countries see it as a precursor to further extensions and higher costs to taxpayers. For other European nations, lower interest rates may mean a return below their initial cost. The sentiment is fueling already growing anti-Euro sentiment, which has surfaced in a number of countries unwilling to cover the costs of Greek overspending. And, given the previously entrenched attitudes towards debt extension and forgiveness by some European countries, it is unlikely that minds will be changed in a matter of hours.
With the decision already delayed twice, a third time may damage the group’s reputation and convince a good majority of investors that current leadership is unable to handle the crisis effectively. The idea would spur Euro selling ahead of key resistance at 1.3100.