Euro zone strikes deal on Greece bailout

February 21, 2012

Euro zone finance ministers have sealed a second bailout for debt-laden Greece that will resolve its immediate financing needs but seems unlikely to revive the nation's shattered economy.

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After a marathon 13 hours of talks, euro zone officials said ministers had nailed measures to cut Greece's debt to about 121 per cent of gross domestic product by 2020, close to their original target of 120 per cent, after negotiators for private bondholders offered to accept a bigger loss to help plug the funding gap.

Agreement on a €130-billion rescue package with strict conditions attached will help draw a line under months of uncertainty that has shaken the currency bloc, and avert an imminent Greek bankruptcy.

"The financial volume [of the Greek package] is €130 billion and debt-to-GDP [will be] 121 per cent. Now it's down to work on the statement," one official involved in the negotiations told Reuters. Another confirmed the figures.

The euro jumped almost half a cent, reversing earlier losses, after Reuters reported the deal had been struck.

A report prepared for ministers by EU, European Central Bank and IMF experts, obtained exclusively by Reuters, said Greece would need extra relief to cut its debts near to the official debt target 2020, given the ever-worsening state of its economy.

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If Athens did not follow through on economic reforms and savings, its debt could hit 160 per cent by that date.

"Given the risks, the Greek program may thus remain accident prone, with questions about sustainability hanging over it," the nine-page confidential report said, highlighting the fact that Greece's problems were far from over.

The accord will enable Athens to launch a bond swap with private investors to help reduce and restructure its vast debts, put it on a more stable financial footing and keep it inside the 17-country euro zone.

About €100 billion of debt will be written off as banks and insurers swap bonds they hold for longer-dated securities that pay a lower coupon.

Private sector holders of Greek debt are expected to take losses of 53.5 per cent or more on the nominal value of their bonds. Previously they had agreed to a 50 per cent nominal writedown, which equated to about a 70 per cent loss on the net present value of the bonds.

The debt sustainability report delivered to ministers last week showed that without further measures Greek debt would fall to only 129 per cent by 2020.

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The IMF had said if the ratio was not cut to nearly 120 per cent, it may not have been able to help finance the bailout, putting the whole scheme in jeopardy.

To help fill the financing gap, one senior euro zone source said the ECB would pass up profits it has made from buying Greek bonds over the past two years under its emergency bond-buying programme.

The ECB has spent about €38 billion on Greek government debt that is now worth about €50 billion. By forgoing that profit and redistributing it to national euro zone central banks, the ECB can indirectly provide debt relief to Athens.

Economists say that, whatever its constituent parts, the deal may only delay a deeper default by a few months. A turnaround could take as much as a decade, a prospect that brought thousands of Greeks on to the streets on Sunday to protest against austerity measures.

DOUBTS OVER COMMITMENT

Sceptics question whether a new Greek government will stick to the deeply unpopular programme after elections due in April, and believe Athens could again fall behind in implementation, prompting exasperated lenders to pull the plug once the euro zone has stronger financial firewalls in place.

While there are doubts in Germany and other countries that Greece will be able to meet its commitments, including implementing €3.3 billion of spending cuts and tax increases, the threat of contagion from a chaotic Greek default always made a deal more likely than not, no matter how tortuous the negotiations.

Greek Prime Minister Lucas Papademos, International Monetary Fund managing director Christine Lagarde and ECB president Mario Draghi all attended the Brussels talks in a sign they were likely to be decisive.

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