Europe Reaches a Greek Deal



BRUSSELS—Greece ended months of uncertainty by finally securing a new bailout and debt-restructuring agreement with euro-zone finance ministers, but doubts remain over whether Greece will be able to meet the ambitious terms of the accord.







The finance ministers agreed on the long-awaited €130 billion ($171.9 billion) deal after haggling into the early hours of Tuesday morning to settle the final details.

Officials said the meeting, which lasted nearly 13 hours, produced a plan that would reduce Greece’s debt to 120.5% of gross domestic product by 2020. International Monetary Fund Managing Director Christine Lagarde said that target was lowered from 129% at the start of the meeting.

Private-sector creditors agreed to take a write-down on their bonds of 53.5%—more than the 50% write-down that had been conceded before the meeting. The private-debt exchange is expected to cut Greece’s debt by €107 billion, according to the Institute of International Finance, which negotiated on behalf of bondholders.

According to a statement from the finance ministers, Greece would also benefit from an arrangement in which the European Central Bank would distribute profits on its estimated €45 billion to €50 billion in holdings of bonds it bought in the secondary market in 2010-11 to euro-zone governments, which may then use them to help Greece.

Profits on an estimated €12 billion of bonds held by national central banks in the euro zone will be passed on to Greece, reducing its debt by €1.8 billion before 2020. The meeting decided against the central banks participating in the private-sector debt exchange.

The ministers also agreed to a further reduction in interest rates on the €53 billion in loans from the euro-zone made as part of the first bailout agreed upon in May 2010, saving some €1.4 billion.

“The deal is a good result for Greece, for the euro zone and for the markets, we hope,” said Italian Prime Minister Mario Monti after the meeting.

Even with the agreement, economists expect the deal will leave longer-term questions about Greece’s ability to pay off even its reduced debt burden. “There are downside risks. This is clear,” said the IMF’s Ms. Lagarde. “It’s not an easy program. It’s a very ambitious program.”

The problem: The Greek economy must become more competitive through across-the-board wage cuts, allowing the country to export its way back to economic health. But that hoped-for export boom could take years to materialize.

Meanwhile, falling wages will only deepen Greece’s recession, making the government’s debt burden—still large even after the restructuring—harder to bear.

The ministers agreed that the European Commission, the European Union’s executive arm, would have “an enhanced and permanent presence on the ground” in Greece to better monitor Greece’s economic performance.

Greece also agreed to put money corresponding to the following quarter’s debt servicing bill into a special segregated account, and would agree to introduce a change in the Greek constitution to ensure priority is granted to debt repayments.

The second bailout would offer Greece €130 billion in loans on top of the €110 billion it received from the euro zone and the IMF in May 2010. The IMF, concerned about its large exposure to the euro zone, is expected to offer just a minimal contribution this time around, leaving euro-zone governments to shoulder the vast majority of the second loan package.

The IMF agreed to provide €30 billion of the first bailout, but officials last week expected its contribution to be just €13 billion this time around.

The agreement will set in motion an exchange of an estimated €200 billion of Greek government bonds in private hands for new bonds with roughly half of their face value, which must be completed by the middle of next month. That exchange could set off legal disputes with disgruntled bondholders.

Marie Diron, an economist at Oxford Economics, said, “They have to satisfy the euro-zone governments while at the same time making very tough measures acceptable to their population. That is something a technocratic government can perhaps manage, but after the election it might become much more difficult for an elected government to satisfy these two goals.”

Some euro-zone governments have taken a harder line with Greece. German, Dutch and Finnish officials have become increasingly skeptical that Greece will implement the painful economic policies its Parliament backed.

Dutch Finance Minister Jan Kees de Jager, speaking before the finance ministers’ meeting, called for “permanent” oversight of the Greek government by officials of the so-called troika—the European Commission, the ECB and the IMF.

“When you look at the derailments in Greece, which have occurred several times now, it’s probably necessary that there’s some kind of permanent presence of the troika in Athens,” Mr. de Jager told reporters upon arriving at the finance ministers’ meeting. “Not every three months, but more permanent.”

If Greece dutifully adheres to policies prescribed by the troika, the economic impact could be harsh, Ms. Diron said.

“Cuts in the minimum wage will bite very hard,” she said.

Lowering the minimum wage is supposed to address some of the failures of the previous austerity packages, which focused on reducing the government’s borrowing needs.