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EU Bails Out Greece for $157 Billion: A Marshall Plan with Haircuts

EU Bails Out Greece for $157 Billion: A Marshall Plan with Haircuts
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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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16 comments

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7:01PM PDT on Sep 17, 2011

Noted!

8:07AM PDT on Jul 24, 2011

(Cont)
way to get re-elected, but some realism and honesty would surely sava e lot of trouble to everybody in the long run.

8:06AM PDT on Jul 24, 2011

I remember when the Euro was to be implemented and we ha dthe referendums. Many people were already predicting this was a wonderful idea in a utopic world, but quite a stupid one in the real world.
Of course, politicians said itw ould be great. Apparently no one thought what would happen if the countries sharing the Euro has substantial differences in makine ends meet (as they had already before the Euro). It was clear the powerful ones would not slow down for the others, and if the others could not follow pace with the big ones before, how were they supposed to do that under the Euro?
The answer to this was -at that time- that taxes would be lowered, importation/exportations would work better, that people woudl be able to travel freely from one area to the other and other stuff of the sort.
All very nice, but it didn't work like that. Taxes have never been the same, not the price of products around the Euro area. Countries who had big production of milk (for example) had to cut their production and import from other areas (causing great harm to internal economy). People, in practice, can not freely move between areas.
...And if the poorer countries start sinking, they pull with them those that are closest to them as it is happening now.
Very few were smart enough to see the potential perils and keep their own currency.
Maybe one day, with responsible politicians, we'll be faced with clear and objective facts instead of popular wishful thinking. It may not be the best

2:40AM PDT on Jul 24, 2011

The problem is the banks. These depts are set up like traps and what they don't tell you is that they interfere with domestic policy in ways that make it difficult for these countries to get past problems and make money to pay them off.

As for us, we are continuously wasting money not on our people but on grants, and foreign policy hand outs. Tons of money and with out good cause other than to act as leverage for the same corps selling out our jobs and manipulating our market so they can more easily set up shop and proceed to suck the life out of the next target country.

We are being taken for a ride and people need to stop listening to GOP, Koch and Newscorp BS.

1:39AM PDT on Jul 24, 2011

Thanks for this article.

10:13PM PDT on Jul 23, 2011

take heed obama this is where we are heading with your i want more debt ceiling and planning more giant spending to jump start the economy. it's time to clean our budget mess up not keep going further in debt. please take obama's checkbook away. i don't want to become greece.

7:55PM PDT on Jul 23, 2011

What's going to happen to these marginal economies when ours goes under? I'm afraid we'll suck many countries down the tube with us.

12:52PM PDT on Jul 23, 2011

The entire World economy and society is resembling France at the time of Louis & Marie losing their heads for the bad governance & societal imbalance due to their poor to non existent leadership.
America has abdicated to a worse predicament than anywhere on earth with wholesale violations of the U.S. constitution with its base rooted in early Greco/Roman Democracy.
We Americans need to prepare for a disasterous near future, one which could invoke actions not seen here yet since the 1770's.

9:26AM PDT on Jul 23, 2011

A couple more of such "bail outs" and Greece will sink... and it's not the last in the row. I believe Bildelberg Club has huge plans in respect.

8:28AM PDT on Jul 23, 2011

With apologies to my Native American friends, if the IMF is involved it's more like the Marshall Plan with scalping. This is not good. Anything the IMF touches turns to sold. As in the US the middle class in Greece (and Italy and Portugal) is about to, forgive my crudeness, take a kick to the crotch while the wealthy get fatter.

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