More time to argue about Greece

Image copyright Reuters
Image caption The battle over Greece is being waged on more than one front

The Greek government might be living on borrowed time, but European finance ministers have just borrowed a bit more. As I said on the Today programme this morning, the IMF has blinked in the battle over how - and when - to agree a second European rescue package for Greece.

Assuming that some form of Greek government emerges out of the political discussions now under way in Athens, it is now almost certain that Greece will get the official money it needs to stay above water a few more weeks, notably the next tranche of last year's EU-IMF bailout.

All the eurozone ministers have to do is agree in principle to fill the funding gap in the Greek economic programme, which they will now do on Sunday.

The trouble is, they have always agreed on the principle: indeed, the only thing that France, Germany and the ECB can agree is that a second support programme for Greece is essential. Rightly or wrongly, they are united in the belief that letting Greece go it alone would be a catastrophe - for Greece and for the eurozone.

Where they disagree is on the form that support should take and - as I have discussed many times here - the role of the private sector. By refusing to disburse the next 12bn-euro tranche of last year's 110bn-euro bailout, the Fund had hoped to force eurozone ministers' hands. It hasn't worked. As was made abundantly clear by their special meeting on Tuesday, Germany is sticking to its guns.

There have been wobbles in the past few weeks, but in public, at least, the German finance minister is just as adamant today as he was four weeks ago that the deal needs to force private bondholders to do something which they would not otherwise choose to do.

That is his test of private sector involvement: that private institutions and investors hold a greater quantity of Greek bonds, for longer, over the next few years than they would otherwise have done.

Unfortunately, that is very close to the ECB's - and the ratings agencies' - definition of a "selective default", for which Greek banks would be quickly and decisively punished. The more you offer the private sector "incentives" to roll over debt or extend its maturity, the less voluntary it becomes.

As the European Commission pointed out this week in a private paper revealed by the FT, if the new rescue package did trigger a "selective default" and lock Greek banks out of ECB funding, Greece would then need additional official support, to shore up their banks. In other words, "involving the private sector" in the rescue could end up forcing even greater costs on European governments, which you might think rather undermined the point of the entire exercise.

In theory, there is a a very small amount of space between the German definition of private sector involvement and the ECB's - and the French - definition of selective default. But it's proving devilishly hard to find. So hard that - as the European Commissioner Olli Rehn confirmed this morning - there is now little chance of them reaching an agreement before next week's Ecofin meeting.

All they will agree on Sunday and Monday, with great fanfare, is that a second support programme will go ahead. Bondholders will have to wait until the next meeting, in early July, to find out whether and to what extent that programme will involve them.