- Associated Press - Thursday, February 16, 2012

BRUSSELS (AP) — Current plans to save Greece from financial collapse still would leave the country with debt far above the maximum level set by its international creditors, a European diplomat said Thursday.

When leaders of the 17 euro countries tentatively agreed on more help for Greece in October, they said the country’s debt load had come down to 120 percent of its economic output by 2020 — the maximum they said was manageable without external support. The new level is now expected to be closer to 129 percent, the diplomat said.

The fact that even substantial new help, both from the eurozone and private bondholders, cannot decrease Greece’s debt load sufficiently is one of the main reasons doubts over a second, 130-billion-euro ($170 billion) bailout for Athens have emerged.

The diplomat was citing figures from a new report by Greece’s international debt inspectors — the European Commission, the International Monetary Fund and the European Central Bank.

The report analyzes Greece’s growth prospects over the coming years as well as the impact of new austerity measures promised by Athens, a 100-billion-euro ($130.92 billion) debt relief Greece has negotiated with private bondholders and the new bailout.

The diplomat was speaking on condition of anonymity because the report is confidential. He couldn’t say into how much money would be necessary to close the gap between the 129 percent and the 120 percent target. At the moment Greece’s debt is just above 160 percent of economic output and, without the debt relief, it would rise to around 200 percent by the end of this year.

The fact that there is a financing gap in the new aid program has been known for some time and is one of the main reasons the debate over the new bailout has heated up in recent days. Politicians — particularly those from rich countries such as Germany, the Netherlands and Finland — have cited the so-called debt sustainability analysis for Greece as one of the main elements in their decision over whether to send more money to Athens.

Officials from the eurozone countries, the European Commission and the IMF have been discussing for weeks how to close the gap to the 120 percent goal.

The biggest hopes have been laid on the ECB, which holds some 50 billion euros ($65 billion) to 55 billion euros ($72 billion) in Greek government bonds. Since the central bank bought these bonds at a discount — analysts estimate the ECB spent around 40 billion euros ($52.37 billion) — it stands to make a hefty profit if they get repaid in full.

For the past few weeks, ECB officials have hinted that the bank could redistribute these profits to the eurozone countries that are its shareholders, which could then use those funds to further support Greece. However, no final decision has been announced so far.

Another way to help close the gap would be to further lower the interest rates on the bailout loans Greece has been receiving since May 2010.

The diplomat said another option had been discussed by finance ministers during their conference call Wednesday night: helping Greece with an upcoming 5.5-billion-euro ($7.21 billion) interest payment to bondholders. But he said no decision had been taken on that proposal.

In recent days, concern has crept back into the markets that Greece could still be forced into a disorderly default on a vital 14.5-billion-euro ($19 billion) bond repayment due next month.

In addition to the financing gap revealed in the new report, politicians in several countries have questioned the commitments of the leaders of Greece’s main political parties to implement promised reforms and cuts even after elections expected in April.

Lackluster implementation would further increase the financing gap in the bailout program and leave Greece even further away from a manageable debt load.

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