EUROPEAN leaders have finally agreed the terms of the second Greek bailout, which they hope will bring down the country’s crushing debt burden and allow for a long-term shift towards stable economic growth.
International Monetary Fund (IMF) boss Christine Lagarde praised the deal, saying it “will create the space needed to secure improvements in debt sustainability and competitiveness” and “pave the way for a gradual resumption of economic growth”.
The IMF will back up the bailout, supporting the Eurozone’s efforts.
However, the deal is not yet in place as Greece needs to alter its constitution to allow international monitors a permanent place in its government.
Private sector bondholders have taken a major loss on their investments; countries which have made loans to Greece have agreed to charge a much lower rate of interest; and the country will be closely monitored to make sure it sticks to its promises of lower spending.
Leaders hope the Greek economy will begin to recover and be able to finance its own spending by 2014, and that its debt to GDP ratio will fall from the current level – above 160 per cent – to a more manageable 120.5 per cent by 2020.
Investors are to take a 53.5 per cent write-down on their holdings of Greek debt, and swap the remainder into other assets. They will receive long-term Greek bonds equivalent to 31.5 per cent of the principle holdings, plus bonds in the European Financial Stability Facility worth 15 per cent, resulting in a total write-down of around 70 per cent – or €107bn.
Other countries have also contributed, agreeing to cut the interest charged on their loans to 150 basis points. The actual cash being received by Greece will be held in an escrow account, which means creditors will be paid first before money is released for Greece to spend.
AT A GLANCE: THE SECOND BAILOUT DEAL
● PRIVATE SECTOR HAIRCUT
Private sector bondholders are expected to take a 53.5 per cent nominal loss, slightly up from the 50 per cent agreed in October. This should shave €107bn off privately held Greek debt.
● EUROZONE LENDING RATES CUT
Various Eurozone states have made bilateral loans to Greece. The rates on these loans will be reduced to 150 basis points, reducing the debt-to-GDP ratio by 2.8 percentage points.
● BOND PROFITS RETURNED TO GREECE
Where Eurozone governments’ central banks own Greek debt, the equivalent of any profits accrued from these holdings, up until 2020, will be paid to Greece – wiping 1.8 per cent off the Greek debt ratio.
● GREEK CUTS TO BE MONITORED
The Eurogroup welcomed €325m of additional cuts, yet lenders will have “a permanent presence” in Athens to oversee reforms and cuts.
● AND OF COURSE…THE ACTUAL BAILOUT
On the condition that the Greek government sticks to its side of the deal, Eurozone states confirmed a total €130bn bailout, with the IMF expected to chip in.