European finance ministers last night secured a deal on a new debt target for Greece, opening the way for the latest instalment of bailout money to be released – a crucial measure if the country is to avoid a catastrophic default on its debts and an exit from the single currency.
The release of the latest €31bn (£25bn) tranche of aid had been held up by a disagreement between donors from the European states and the International Monetary Fund over the long-term sustainability of Athens' public finances.
Greece's debt-to-GDP ratio was supposed to fall to 120 per cent by 2020 under the terms of its second €130bn bailout, agreed in March. But a deeper-than-expected recession opened up a €10bn funding gap.
European finance ministers agreed last night that the ratio would drop to the slightly higher figure of 124 per cent, according to reports, reducing the country's debt by €40bn.
However, it was not clear whether this would be achieved by extending the repayment period of loans to Athens, reducing the interest rate, allowing Greece to buy back its bonds, or writing down the value of the country's loans and imposing losses on creditors. Discussions on these details were continuing late into the night. Germany, Finland and the Netherlands have been opposed to writing down the value of their loans to Athens, but the IMF has argued that without this "official sector involvement" in debt forgiveness the hole in the country's finances cannot be filled. One official told the Reuters news agency: "It's going very slow, but we have financing and a Debt Sustainability Analysis. We've filled the financing gap until the end of programme in 2014."
Greece's coalition government, led by the Prime Minister, Antonis Samaras, agreed a further round of cuts earlier this month worth €13.5bn, fulfilling its own conditions of the bailout terms.
The Greek economy has contracted by a fifth over the past five years and the unemployment rate has soared above 20 per cent as a result of the deep austerity measures already enacted.
A poll yesterday suggested that the anti-bailout Syriza party, which trailed Mr Samaras's New Democracy party in June's elections, would win if a national vote was held today. According to a poll in an Athens-based newspaper, Syriza has the support of 26.9 per cent of the electorate, against New Democracy's 21.5 per cent share.
In June, New Democracy commanded 29.6 per cent of the vote and Syriza 26.9 per cent. Support for the far-right Golden Dawn party has also surged, rising to 13.5 per cent, from 7 per cent in June. Greece's public debt-to-GDP ratio is set to rise to 190 per cent of GDP next year and the economy is expected to contract by 4.5 per cent. The IMF's statutes stipulate that it can only lend to countries providing that their public finances are on a stable trajectory.