BRUSSELS (AP) — After more than 12 hours of talks, the countries that use the euro reached an agreement early Tuesday to hand Greece euro130 billion ($170 billion) in additional bailout loans to save it from a potentially disastrous default next month.
The eurozone and the International Monetary Fund, which will be providing the money for the new bailout, hope the new program will eventually put Greece back into a position where it can survive without external support and secure its place in the euro currency union. Finance ministers from Greece and the other 16 euro countries meeting in Brussels wrangled until the early morning hours over how that could be achieved.
On top of the new rescue loans, Athens will also ask banks and other investment funds to forgive it some euro107 billion ($142 billion) in debt, while the European Central Bank and other national central banks in the eurozone will forgo profits on their holdings.
The accord, which had been months in the making, seeks to reduce Greece’s massive debts on all fronts, with both private and official creditors going beyond what they had said was possible in the past.
But despite those unprecedented efforts, it was clear that Greece, which kicked off Europe’s debt crisis two years ago, was at the very best starting on a long and painful road to recovery. At the worst, the new program would push the country even deeper into recession and see it default on its debts further down the line.
“It’s not an easy (program), it’s an ambitious one,” said Christine Lagarde, the head of the IMF, adding that there were significant risks that Greece’s economy could not grow as much as its international creditors were hoping.
The eurozone – and Greece – had been under pressure to reach an accord quickly to prevent Athens from defaulting on a euro14.5 billion ($19.2 billion) bond payment on March 20. The fear is that an uncontrolled bankruptcy even of relatively small Greece could unleash market panic across the rest of the continent. That would further unsettle other struggling countries like Ireland, Portugal or the much bigger Italy or Spain.
Despite the promise of new rescue loans, which come on top of a euro110 billion ($146 billion) bailout granted in 2010, the other 16 euro countries made clear that their trust in Greece is running low. Before Athens will see any new funds, it has to put into practice a whole range of previously promised cuts and reforms.
More significantly, Greece will have to pass within the next two months a new law that gives paying off the country’s debts legal priority over funding government services. In the meantime, Athens has to set up a kind of escrow account, managed separately from its main budget, that will at all times have to contain enough money to service its debts for the coming three months.
These requirements, together with tighter on-the-ground monitoring, are an unprecedented intrusion into the fiscal affairs of a sovereign state in Europe and could eventually see Greece being forced to pay interest on its debt before compensating teachers, doctors and other state employees.
Greek politicians nevertheless greeted the package as a turning point for their battered country.
“It’s no exaggeration to say that today is a historic day for the Greek economy,” said Greek Premier Lucas Papademos, who had rushed to the finance ministers’ meeting to lend weight to his country’s pleas for help.
The eurozone and the IMF said the deal is expected to bring Greece’s debt down to 120.5 percent of gross domestic product by 2020 – around the maximum that they consider sustainable. At the moment, Greece’s debt stands at more than 160 percent of GDP.
The euro spiked 0.5 percent to $1.3264 following the deal but stock markets in Europe were trading slightly lower, having enjoyed solid gains in the run-up to the meeting on the expectation that a deal would be secured.
But to reach a successful outcome, the finance ministers had to fight on many fronts.
The representatives of private holders of Greek debt had to agree to steeper losses than they had previously said was possible in a voluntary debt relief. The Institute of International Finance said that the bond swap could see Greece’s debt reduced by euro107 billion immediately, while longer repayment deadlines and lower interest rates will cut its debt servicing costs over the next decade.
Not only private investors had to give.
The eurozone countries will reduce the interest that Greece has to pay for its first package of bailout loans to 1.5 percentage points over market rates from between 2 percentage points to 3 percentage points currently, cutting both its debt load and limiting the need for new rescue loans.
At the same time, the European Central Bank and the national central banks in the countries that use the euro will forego profits on their Greek debt holdings, again reducing the costs for Greece.
“It’s a very good accord in the sense that it is equitably divvied up,” said French Finance Minister Francois Baroin. “The Greeks have made their efforts. The Europeans are playing their supporting role, in their role as creditors … And the private sector part goes beyond” what could be expected.
But several hurdles remain before Greece will see any of the money or other benefits of the new program.
Apart from the implementation of more than 30 different savings and reform measures by Greece, the new bailout has to be debated by parliaments in several member states, including Germany, the Netherlands and Finland.
The IMF also still has to decide how much of the euro130 billion bill it is willing to stump up. Going into the meeting, the Washington-based fund had indicated that its contribution will be lower than the one-third of the total it has provided in previous bailouts.
The IMF’s Lagarde said the fund’s board would decide on its contribution in the second week of March.
“In doing so it will have in mind the overall program, but also additional matters such as the proper setting up of a decent firewall,” Lagarde said with reference to Europe’s current and future bailout funds.
At the moment, the overall ceiling for eurozone rescue loans has been set ateuro500 billion ($663 billion), much of which has already been committed to Ireland, Portugal and now Greece. Euro leaders will decide at their summit in early March whether that ceiling should be increased.
On top of that, it will also take some time to see how many private creditors will participate in the debt relief and how many of them will have to be forced to sign up through new legal clauses Greece plans to implement. Some analysts fear that imposing losses on even some bondholders may destabilize markets.
Perhaps most crucially, however, may be new national elections in Greece scheduled for April, which could upend the political landscape in the country. The leaders of the two main parties have committed to the cuts and reform program, but anti-bailout parties have been gaining in the polls
