On Thursday, after months of debates, riots in Athens’ central Syntagma Square and the near-implosion of the Greek government, European leaders meeting in Brussels approved a second bailout of Greece that will give the euro zone’s most troubled economy more time to repay its debts and reduces its debt burden. The bailout package provides Greece with a total of 109 billion euros ($157 billion) and also contains debt relief for Ireland and Portugal, the latter two countries having also received bailouts from the European Unions’s Central Bank and the International Monetary Fund. The deal is, as the New York Times says, a “last-ditch effort to preserve the euro and stem a broader financial panic” in the form of contagion leading to bondholders who might have otherwise tried to unload their Irish, Portuguese and even Spanish and Italian bonds.
To get the deal in place, European leaders had to get private investors and bondholders to write down the terms of the loans on Greece’s massive debt — to accept some losses on their bonds. The banking sector has agreed to exchange and roll over 54 billion euros of Greek debt. The deal, which some describe as a new “Marshall Plan with haircuts” for Europe, indeed shows the lengths European leaders have been willing to go to save the euro. It will be seen as a “selective default” by credit rating agencies, a situation that the central European bank had earlier ruled impossible as it means that investors in Greek debt will have to accept some losses on their bonds. According to the terms of the new plan, private investors will have to take a haircut worth 21 percent of the market value of their debts.
If Greece had defaulted on its debt, which comprises 150 percent of the country’s Gross Domestic Product, European leaders feared a selling off of other European bonds. Such a situation would have meant that other countries would not have been able to get reasonable interest rates to finance themselves.
The package allows Greece to roll over its maturing debt and then pay a lower interest rate on its bailout loans, say the Guardian.
The New York Times describes more details of the new plan:
Greece would receive assistance in several ways. Holders of short-term obligations would be able to swap their notes for debt with longer maturities and backed by high-rated bonds. An organization that includes most major European banks said its members would accept the offer and expected 90 percent of all Greek bonds to be exchanged.
Separately, officials said that the terms of the aid package from Europe to Greece would be eased, with maturities lengthened to 15 years from 7.5 years, at an interest rate of a quite low 3.5 percent.
The euro zone leaders would give wide-ranging new powers to the region’s rescue fund, the European Financial Stability Facility [EFSF] , by allowing it to buy government bonds on the secondary market and to help recapitalize banks — which might be needed when they write down the value of their Greek bonds.
The new powers would effectively turn the facility into a prototype European monetary fund — a move that has long been resisted by Germany, the euro zone’s richest nation, but that has drawn the support of economists and government officials outside Europe.
The 440 billion euro EFSF rescue fund was established last May and will now have its power expanded, to help the debt crisis from spreading to Italy and Spain.
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