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FACTDROP: Eurozone strikes Greek aid deal


Eurozone strikes Greek aid deal

Πηγή: FT
By Peter Spiege
Nov 27 2012

After two false starts in as many weeks, international lenders on Tuesday finally reached a deal to overhaul Greece’s faltering bailout programme and release a long-delayed €34.4bn aid payment by agreeing to a series of measures that could relieve Greece of billions of euros in debt by the end of the decade.

The measures, which include reducing interest rates on Athens’ bailout loans to levels so low that some countries will probably take losses on them, are intended to cut Greek debt levels to 124 per cent of economic output by 2020, or 20 percentage points lower than Athens’ current debt path, officials said.

But several of the elements remain unfinished, including a Greek debt buyback programme whose success remains so uncertain that Christine Lagarde, the International Monetary Fund chief, said her institution would not release its portion of Greek bailout aid until the transaction was successfully completed.

Ms Lagarde sought to play down the delay, saying the IMF and eurozone governments had disbursed out their tranches at different points in the past. But the difference highlighted ongoing tensions between Brussels and Washington that forced Monday’s late night meeting – the third Brussels gathering in two weeks on the Greek programme.

The IMF had been holding out for a deal to get Greece’s debt levels to 120 per cent of gross domestic product by 2020, a target which would have likely forced eurozone governments to make substantial writedowns on their bailout loans – something deemed politically explosive in creditor countries like Germany and the Netherlands.

In exchange for allowing a loosening in the target to 124 per cent, Ms Lagarde secured a commitment to get debt levels to “substantially below” 110 per cent in 2022, a promise that could force eurozone governments to provide even more debt relief in the future.

“It’s been hard work,” said Ms Lagarde of the negotiations. Added Jean-Claude Juncker, who chaired the meeting as head of the eurogroup of eurozone finance ministers: “This has been a very difficult deal.”

Equity markets in Asia were generally higher in morning trading with Japan’s Nikkei 225 up 0.4 per cent, the Hang Seng increasing 0.4 per cent in Hong Kong, and South Korea’s Kospi index moving 1 per cent higher. The Shanghai Composite fell 0.7 per cent, touching multiyear lows. The US dollar gained slightly to 1.2985 dollars per euro.

The centrepiece of the agreement is the change in interest rates on Greek bailout loans. Bilateral loans provided to Athens under its first bailout would be cut 100 basis points, to just 50 points above interbank rates, knocking about €2bn off Greek debt levels, or 2 per cent of GDP by 2020. Some eurozone countries, including Spain and Italy, borrow money at well above interbank rates, meaning they will probably be lending to Greece at a loss.

In addition, both the bilateral loans and assistance provided under a second Greek bailout, which is financed by the eurozone’s €440bn bailout fund, will have their maturities delayed another 15 years. Interest payments on the second bailout will also be deferred by 10 years.

The second main element was an agreement by eurozone governments to give up about €7bn owed to them by the European Central Bank for profits on Greek bonds the bank holds. That money will instead be passed back to Greece, and officials said that would knock another 4.6 per cent of GDP off of Greek debt levels by 2020.

That leaves a substantial amount of the debt relief to the debt buyback programme. Eurozone officials refused to disclose details of the programme, saying they feared it would lead to a run-up in Greek bond prices, thus undermining its success. The key to a debt buyback is to purchase outstanding bonds at heavily distressed prices, allowing Greece to retire the debt far more cheaply than if they had to pay the bonds off when they reached maturity.

But in a statement, finance ministers said the buyback price for bonds could be no higher than prices at Friday’s market close – meaning there will be little if any premium offered to private debtholders, raising questions about how many will participate.

Even with the uncertainty, eurozone officials said they would release their €34.4bn once national parliaments approved the changes to the bailout; Mr Juncker said he aimed to finalise the payment by December 13. Another €9.3bn in delayed aid, which was also approved last night, will be disbursed in three separate “sub-tranches” in the first quarter of 2013 as long as Greece meets reform targets included in the programme.

Eurozone officials said they believed the overhauled bailout would be less subject to volatility in the future, since it includes automatic budget cuts in Greece’s fiscal accounts if Athens begins veering off track again. Since the first bailout was agreed in May 2010, eurozone officials have been forced to agree a second bailout and conduct a major overhaul of that second plan twice.

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