German FinMin warns on Greek bailout deal

GABRIELE STEINHAUSER NICHOLAS PAPHITIS Associated Press Published:

BRUSSELS -- (AP) -- Hours after Greece made the unpopular decision to slash government spending in an attempt to ease its debt crisis, Germany's finance minister questioned whether the deal goes far enough to earn a crucial €130 billion bailout.

Greece's new austerity plan would make deep cuts to wages and public-sector jobs and it ignited fresh criticism from unions and the country's deputy labor minister, who resigned in protest. But finance ministers from the other 16 countries that use the euro at a meeting in Brussels to scrutinize the deal indicated that even those painful steps may not be enough to get Greece's economy back on track.

Greece is under immense pressure to reach a rescue deal. On March 20, it has to repay €14.5 billion in bonds -- money which it doesn't have. The country's total debt is €350 billion -- equivalent to 160 percent of its economic output -- and unsustainable for a country in its fifth year of recession.

Greek Prime Minister Lucas Papademos earlier Thursday said that all major party leaders in the country's coalition government had given their backing to a new round of painful spending cuts he had worked out with the European Union, the European Central Bank and the International Monetary Fund and that the talks "were successfully concluded."

The cross-party support was a key demand from Greece's international creditors, which had remained elusive during marathon talks over the past weeks.

The focus has now shifted from Greece to its European neighbors who must give their blessing to the austerity plan before the bailout funds are released. Finance ministers meeting in Brussels Thursday were nervous Greece would not stick to its austerity targets and that there may still be a gap in the country's finances.

Germany's Finance Minister Wolfgang Schaeuble on Thursday warned that on the new round of spending cuts appears to not yet fulfill all the conditions for a €130 billion bailout, which Athens needs to secure to stave off bankruptcy.

As the largest economy in Europe, Germany is a leading force in the group of 17 countries that use the euro -- the so-called eurozone -- wielding its considerable economic clout to steer decision-making and policy.

"The agreement, as far as I understand, is not at a stage where it can be signed off," Schaeuble said as he arrived at a meeting with his eurozone counterparts. "It's a stance in the negotiations that was agreed on but no one expects that this negotiation stance can get support."

Speaking in Frankfurt as the European Central Bank announced that it was keeping interest rates unchanged, bank president Mario Draghi left open a legal door for the ECB to help lighten Greece's debt load at some point, saying the bank could distribute profits it stands to make on its Greek bonds to member states.

When eurozone leaders tentatively agreed on a second bailout for Greece in October, they set several key parameters that would have to be met for country to get more aid.

Those included bringing Greece's debt level down to 120 percent of economic output by 2020, limiting official rescue loans to €130 billion and getting firm approval from all Greek political forces that new spending cuts and reforms would actually be implemented.

"Those general requirements are not fulfilled yet," Schaeuble said, adding that no decision on the new bailout was expected at Thursday's meeting.

Schaeuble's comments, which were supported by other eurozone officials, indicate that despite the deal in Athens, Greece remains under the threat of bankruptcy despite the progress made in Athens.

Party leaders approved all the cuts demanded by the troika debt inspectors -- including a 22 percent cut in the minimum wage, firings 15,000 of civil servants and an end to dozens of job guarantee provisions.

A spokeswoman for Papademos said the leaders also found an alternative for an estimated €300 million ($400 million) in pension cuts that they had previously rejected, without elaborating on the new plans.

Greece is also under pressure to implement a complex swap deal with private bondholders designed to cut its debt by some €100 billion.

A forced bankruptcy then would likely lead to the country's exit from the euro common currency, a situation that European officials have insisted is impossible because it would hurt other weak countries like Portugal, Ireland and Italy. Financial analysts fear an uncontrolled default could trigger a chain reaction similar to the financial meltdown that followed the collapse of U.S. investment bank Lehman Brothers in the fall of 2008.

But the rest of the eurozone and the IMF, which have to put up the money for the Greek rescue, were not swayed so easily.

"There are a lot of questions on the substance of the program," said a European official, giving backing to Schaeuble's comments.

The official said he still saw 10 to 15 issues before the deal could be concluded, including doubts that the October parameters can be reached and whether the promised reforms would really restore the competitiveness of Greece's economy. The official spoke on condition of anonymity because of the sensitivity of the negotiations.

In addition to the austerity deal, the eurozone also still needs to sign off on a debt swap with banks and other private investors, which Greece's Finance Minister Evangelics Venizelos planned to present to his eurozone counterparts at Thursday's meeting.

Representatives for the Institute of International Finance, which is leading the debt swap talks for the private creditors, were also in Brussels.

Last week, an EU official said that even taking into account the debt forgiveness and planned austerity measures, a gap of some €15 billion remained to reach the October targets.

The EU hopes that the ECB, which holds a significant amount of Greek bonds, will contribute to closing that gap, but the central bank has so far dodged questions on whether it will participate.

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Paphitis reported from Athens, Greece. Raf Casert contributed from Brussels.