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Another day, another meeting in Europe on Greek debt–a deal looks closer but we’ve been down this road before

posted on November 26, 2012 at 2:46 pm
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I doubt that we’re going to see an early decision today on the Greek rescue payment but I am mildly optimistic that we will get a decision today from the meeting of European finance ministers.

In a sign that this is likely to be a long meeting, Jean-Claude Juncker, head of the Eurogroup of euro finance ministers, arrived at the meeting carrying an overnight bag, the Wall Street Journal reports.

In a sign that a decision is more likely than not, the group took an hour-long spreadsheet break at about 10:15 a.m. New York time. In my experience you don’t run spreadsheets unless you’re trying to see how far apart alternative decisions leave the bottom line. Again in my experience, tweaking a spreadsheet is the way that you bridge differences between positions. Side A gives a little on line 46 and Side B gives a little on line 64.

The problem, according to a spreadsheet posted by the Financial Times this morning (http://blogs.r.ftdata.co.uk/brusselsblog/files/2012/11/greece.pdf) is that Greece is on track to see its debt to GDP ratio climb to 144% by 2020 under current policies. That’s not acceptable to the International Monetary Fund, which wants to see sustainability, which it defines as a debt to GDP ratio of 120% or less, by 2020.

Adding in some cuts to the interest rate Greece pays and buying back some debt reduces the ratio to 128% by 2020. That’s still above the IMF’s definition.

Getting the ratio down to 120% requires either stretching out the deadline to 2022 from 2020 (not the IMF’s choice) or having some of the existing official sector bondholders (such as the European Central Bank) write down the value of their debt (not the choice of the Germans.)

It’s hard for me to see how European leaders and the IMF’s Christine Lagarde could fail to bridge this gap with a tweak here or there—hence my optimism about the spreadsheet break. One potential compromise, being reported by Reuters and other news sources out of Brussels, would be a cut in interest rates and some debt buybacks now with a promise to the IMF to lower the Greek debt to GDP ratio to 120% in the future.

That seems possible.

But in my optimism, I’m not forgetting that European leaders have shown an amazing willingness to extend their deadlines for a deal. This isn’t over til the Fat Lady sings.

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