Will the EU Find a Resolution to Greece Stand-Off?

“There are good chances that we will come to a conclusive mutual solution, but I can’t be entirely sure,” said Luxembourg Prime Minister Jean-Claude Juncker to reporters before heading in to chair a meeting of European finance ministers in Brussels.

Officials are meeting on Tuesday to settle disagreements over how to manage Greece’s overwhelming debt. The Greek government needs 15 billion euros ($19.2 billion) in emergency loans in order to avoid going into default, but a recent spat between the International Monetary Fund and EU leaders threatens to slow down progress in negotiations.

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A group led by IMF managing director Christine Lagarde has put its foot down and insists that the country’s debt must be brought down to 120 percent of GDP by 2020. European Union government creditors, led by figures such as German Chancellor Angela Merkel, suggest that reducing debt to 120 percent of GDP by 2022 is a more feasible target. Increasing the acceptable debt load through 2022 means providing more funding for Greece.

Reaching an agreement is critical if deeper financial losses as a result of default are to be avoided. EU leaders will need the support of the IMF in order to execute on any real solution to the Greek debt problem.

Currently, Greek debt is 170 percent of GDP and rising, expected to peak at 190 percent of GDP in 2014. Recent calculations suggest that at best, Greece will only be able to cut debt to 144 percent of GDP by 2020.

Debt at 120 percent of GDP is considered sustainable, a point at which Greece should no longer need emergency funds and would be able to begin reducing its debt independently. Until that point, the Greek economy will only avoid collapse if propped up by other European governments and the IMF, and their support could compromise their domestic economies.

In that vein, Moody’s Investors Service lowered France’s credit rating one level from AAA to AA1. The downgrade understandably raises concerns about the overall health of the euro zone, particularly Germany’s economy — already heavily burdened in its efforts to assist neighbors, is bearing too much weight. Germany’s GDP growth has slowed over the last year, dropping from 0.5 percent growth in the first quarter to 0.2 percent growth in the third quarter.

The Standards & Poor’s Ratings Service expects GDP in the euro zone to shrink 0.8 percent in 2012, led by a contraction of up to 1.4 percent in Spain.

The IMF and European finance ministers won’t be able to make a decision on releasing the funds until parliaments in Germany, the Netherlands, and Finland weigh in. Beyond a judgement on the next step toward solving Greek’s debt crisis, the world will be watching the meeting for signs that leaders are united in whatever decision they do make.

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