07 February 2012

FT: Greece bailout funds could be split

European officials are insisting any new Greek bailout programme specifically earmark funds to pay off remaining holders of Greek debt, giving lenders the freedom to withhold aid to Athens, without risking a default that could reignite panic in financial markets.

Under a new Franco-German plan that senior European officials said is likely to be included in a new Greek rescue, eurozone officials would create an escrow account to accept new bailout funding, instead of paying it all directly to Athens as in the past.

The new fund would then ensure bondholders are paid off, while additional cash to run the Greek government could still be withheld if Athens did not live up to tough new reform demands. The plan, which has backing from the European Commission in Brussels as well as several other eurozone countries, was a way of “removing the Damocles sword of default” while keeping pressure on Athens to reform.

The idea of prioritising debt payments was included in a controversial German proposal circulated to eurozone finance ministry officials last month, which also called for a “budget commissioner” with veto authority over Greek spending decisions.

Eurozone officials said they believed the escrow account would give European Union and International Monetary Fund lenders strong control over Greece’s use of bailout funds, without stripping Athens of its budgetary sovereignty.

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