Optimism that second tranche of funds – €130bn – will finally be released after success of private sector bond swap
Eurozone leaders are locked in talks over how to tackle Greece's deteriorating government finances despite Athens having last week implemented the biggest debt writedown in history.
Eurogroup ministers met in Brussels to agree the release of €130bn (£109bn) of funds to Greece after it succeeded in swapping the bulk of its privately-held bonds with new ones worth less than half their original value.
Greek finance minister Evangelos Venizelos said he expected a positive verdict, though he may be forced to wait until Wednesday to receive formal approval while the group considers his plans to meet austerity targets, agreed as part of the deal. Jean-Claude Juncker, Luxembourg's prime minister and head of the eurogroup, said: "There is no doubt that the second Greek programme will be approved."
Athens is under intense pressure to push through cuts in spending and end protectionist laws before accessing the second tranche of funds. Entering the meeting, Greek officials voiced optimism that eurogroup finance ministers would finally approve the deal. "It will be approved. The mood is very good," an official close to the talks said.
It has taken eight months to get near closing the talks, and the relief is palpable.
"The meeting began with all the finance ministers starting with [German's Wolfgang] Schäuble congratulating Venizelos," the official said. "It's a good day for him and Greece." Though the bond swap will wipe €105bn off Greece's €368bn debt mountain, giving Athens breathing space to enact more austerity, many analysts think that the country's debt remains unsustainable.
The yields on bonds issued under the swap deal, with maturities of between 11 and 30 years, were trading at rates that gave a yield, or effective interest rate, of 13%-19%, indicating that investors think Greece needs to cut its debt a lot more before it can return to markets for funding.
European stock markets closed marginally higher on fears the Greek situation could deteriorate. Concerns over China having incurred its largest trade deficit in a decade also played on market fears, leaving the FTSE up only 5 points.
"Markets are telling us that Greece still faces a Herculean task," said Louise Cooper, markets analyst at BGC Partners. "If the country's problems were solved by the biggest ever sovereign restructuring and the first default in Western Europe for 70 odd years – the last one was Italy in 1940 – then why are the new and shiny bonds trading for the first time today as junk?"
European Union structural funds worth €15bn could be released to Greece if it is judged to have sufficiently reformed. Horst Reichenbach, who heads a European Union task force helping Greece with taxation issues and modernising its bureaucracy, has backed a Marshall Aid-style plan for Greece if it can agree structural reforms, including of its byzantine judicial system. He is to meet union leaders, who have resisted structural changes, and the Greek justice minister, who is tasked with overhauling a justice system more often seen as a hindrance than a help to conducting business in the country.
Officials in Lucas Papademos' interim coalition government brushed aside suggestions that Greece would require to be bailed out for a third time, possibly even before the end of the year.
Wolfgang Schäuble raised the spectre of yet more aid for Athens in an interview with the Belgian newspaper De Morgen. With the latest bailout, Greece will have received €240bn to date. "Nobody can now exclude that Greece at a single moment may need a third bailout," he was quoted as saying. "I have all confidence that the measures that we have taken and that Greece must now implement – no simple exercise – will bring the country on the road to recovery."
But Greek government officials did concede that fears were growing of the country's economic and social tumult giving way to increased violence. Papademos convened a mini cabinet meeting to discuss the issue amid mounting concerns that anti-government protesters will attempt to disrupt Independence Day celebrations on 25 March.
Spain is the next country after Greece to cause concern among the currency club's senior figures. Spain has said it would miss a deficit target of 4.4% of GDP for 2012 agreed with Brussels. It now expects the deficit to be 5.8%.
Brussels is committed to fine countries that step out of line, but has already been told by Mariano Rajoy, Spain's new prime minister, that his government should be offered support and not punishment.