In A scheme that euro leaders dubiously dubbed their very own “Marshall Plan”, after the US’s post-Second World War aid programme for Europe, the parameters of a new Greek bailout were announced in Brussels yesterday:
• In a controversial move, the interest rate on Greece’s loans will be cut to 3.5 per cent when they are transferred to the €750bn European Financial Stability Facility (EFSF). Critics argue that this constitutes reward for failure after Greece missed its deficit target by nearly one per cent last year.
• The maturity of Greece’s debts will also be doubled from 7.5 years to 15 years. This is considerably higher than the maturity of its original three-year rescue funds.
• Eurozone leaders claim that the package will cut Greece’s debt by 12 per cent of GDP, from its current level of 140 per cent.
• The Institute of International Finance (IIF) announced that the private sector will “voluntarily” take part in the deal as Greece will “temporarily” default as its obligations are transferred to the EFSF.
• The aim is for 90 per cent of private creditors to take part in the deal, which, it is said, will reduce Greece’s debt burden by €54bn between now and mid-2014 and by €135bn by 2020.
• The average maturity of Greece’s private debt will be extended from six to 11 years and the current stock of debt reduced by €13.5bn.
• The stock of private sector debt could also be cut “potentially much more through a debt buyback program that is to be defined by the official sector”. The EFSF is likely to be the buyer.
• For private creditors, the likelihood is that the net present value of the Greek bonds that they hold will effectively be cut by 20 per cent through a bond swap.
• However, the aim is to offset this cut in net present value by collateralising the new bonds with triple-A rated bonds.
• The EFSF will also receive a range of new powers from the European Central Bank (ECB). It will be allowed to intervene in secondary bond markets in an attempt to bring down yields, although many argue that this power never proved very effective when exercised by the ECB and saddled the Bank with some €77bn in junk bonds.
• The EFSF will also have a “menu of instruments” to cut down sovereigns’ debt, for example by buying debt from private creditors and cutting its interest rate.
• Crucially, the EFSF will also be allowed to give sovereigns loans in order to recapitalise defunct banking systems. This could prove necessary because if Greece is deemed to have defaulted and the “voluntary” nature of private sector involvement not accepted, its banks will no longer be able to use its debt as collateral for much-needed ECB liquidity funding.
• Eurozone leaders are keen to emphasise the “exceptional” nature of Greece. However, it is not clear if markets will be convinced that other sovereigns will not require a similarly rescue. Ireland and Portugal are both keen for cuts in the interest rate of their bailouts. But the EFSF remains insufficient to bail out Spain or Italy.