Greece secures bailout to avoid debt default

Man­ag­ing Direc­tor of the Inter­na­tional Mon­e­tary Fund Chris­tine Lagarde, left, speaks with Greek Prime Min­is­ter Lucas Papademos dur­ing a round table meet­ing of euro­zone finance min­is­ters at the EU Coun­cil build­ing in Brus­sels on Mon­day. Euro­zone gov­ern­ments will likely approve on Mon­day a long-elusive res­cue pack­age for Greece, sav­ing it from a poten­tially calami­tous bank­ruptcy next month, senior offi­cials said. But finance min­is­ters meet­ing in Brus­sels will have a few last issues to wran­gle over, such as tighter con­trols over Greece’s spend­ing and fur­ther cuts to the country’s debt load. (Asso­ci­ated Press | Yves Logghe)

GABRIELE STEINHAUSER

SARAH DiLORENZO

AP Busi­ness Writers

BRUSSELS — The coun­tries that use the euro pulled Greece back from an immi­nent and poten­tially cat­a­strophic default on Tues­day, when they finally stitched together a euro130 bil­lion ($170 bil­lion) res­cue they hope will also pro­vide a life­line to their com­mon currency.

But the patch­work of mea­sures — includ­ing the imple­men­ta­tion of aus­ter­ity mea­sures in Greece and approval by skep­ti­cal Ger­man and Dutch Par­lia­ments — required to give the res­cue a chance of suc­cess means it’s unlikely to be the end of the continent’s debt crisis.

Euro­pean mar­kets edged lower, hav­ing enjoyed solid gains in the run-up to the meet­ing on expec­ta­tions a deal would be secured, while the euro rose 0.2 percent.

The finance min­is­ters from Greece and the other 16 coun­tries that use the euro wran­gled until the early morn­ing hours over the details of the res­cue, squeez­ing last-minute con­ces­sions out of pri­vate hold­ers of Greek debt.

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.

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.

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 national cen­tral banks in the euro­zone will forgo prof­its on their holdings.

The deal “closes the door to an uncon­trolled default that would be chaos for Greece and Greek peo­ple,” said Euro­pean Com­mis­sion Pres­i­dent Jose Manuel Barroso.

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 hoped.

Includ­ing Greece’s first bailout worth euro110 bil­lion ($146 bil­lion), the new deal means every Greek man, woman and child will owe the euro­zone and the IMF about euro22,000 ($29,000).

In Athens, the reac­tion to the news was a mix­ture of relief the coun­try has avoided finan­cial cat­a­stro­phe and fear of a dark future.

“I don’t see (the agree­ment) with any joy because again we’re being bur­dened with loans, loans, loans, with no end in sight,” archi­tect Valia Rokou said in the Greek capital.

The euro­zone and Greece had been under pres­sure to reach an accord quickly to pre­vent Athens from default­ing on a bond pay­ment on March 20. The fear is that an uncon­trolled bank­ruptcy could unleash mar­ket panic across the con­ti­nent, unset­tling other strug­gling coun­tries like Ire­land, Por­tu­gal or the much big­ger Italy or Spain.

Despite the promise of new res­cue loans, 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 imple­ment a range of promised cuts and reforms.

Greece will also have to pass within the next two months a new law that gives pay­ing off the debt legal pri­or­ity over fund­ing gov­ern­ment ser­vices. Athens also has to set up an escrow account, man­aged sep­a­rately from its main bud­get, that will 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 mean Greece could even­tu­ally be forced to pay inter­est on its debt before com­pen­sat­ing teach­ers or doctors.

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 deal is expected to bring Greece’s debt down to 120.5 per­cent of gross domes­tic prod­uct by 2020 — around the max­i­mum the euro­zone and IMF con­sider sus­tain­able. At the moment, it stands at more than 160 per­cent of GDP.

But as Greece’s econ­omy faces a fifth year of reces­sion, con­fi­dence that it can reach the 120 per­cent tar­get in 2020 was fad­ing quickly.

“One can dis­cuss at length the assump­tions on which this (tar­get) is based,” Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble said. “Because of that we decided to at least be sin­cere about the figures.”

Ahead of the meet­ing, Greece’s inter­na­tional cred­i­tors — the EU, the ECB and the IMF — warned that with­out new mea­sures the debt would still remain close to 129 per­cent by the end of the decade even under its opti­mistic sce­nario. That short­fall per­sisted even though Athens had faced down vio­lent protests to pass a mas­sive new round of cuts and reforms through Par­lia­ment just last week.

So 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 ear­lier said was pos­si­ble. The Insti­tute of Inter­na­tional Finance said the bond swap could see Greece’s debt reduced by euro107 bil­lion imme­di­ately. On top of that, investors will be asked to give Athens 30 years to repay them, com­pared with just under 7 years. Aver­age inter­est rates would fall to 3.65 per­cent from around 4.8 percent.

Jean Lemierre, who was co-heading the talks for the IIF, said over­all losses for pri­vate bond­hold­ers would be above 70 per­cent when account­ing for the new bonds’ longer repay­ment period and lower inter­est rate.

A Greek finance min­istry offi­cial said the bond swap is expected to take place on March 12.

The offi­cial, speak­ing on con­di­tion of anonymity in line with min­istry rules, said responses to the bond swap offer, which will be launched by the end of this week, will be eval­u­ated on March 9 to deter­mine whether at least 66 per­cent of bond­hold­ers are will­ing to par­tic­i­pate. That is con­sid­ered the min­i­mum to make the deal viable.

The Greek gov­ern­ment will sub­mit leg­is­la­tion to par­lia­ment intro­duc­ing col­lec­tive action clauses, which would force reluc­tant investors into the deal.

Pri­vate investors weren’t the only ones hav­ing to give ground.

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.

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.

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. The fund had ear­lier indi­cated its con­tri­bu­tion will be lower than the one-third of the total it has pro­vided in pre­vi­ous bailouts.

IMF chief 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 at euro500 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.

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.

Posted by AP News on Feb 21 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.