EU Bails Out Greece for $157 Billion: A Marshall Plan with Haircuts
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.
Before the meeting, Nicolas Sarkozy of France, Angela Merkel of Germany and Jean-Claude Trichet, the president of the European Central Bank, had met in Berlin and worked out a plan according to which euro zone taxpayers will have to cover the costs of the rescue. Since 2009, taxpayers in European, and Germans most of all, have “seen their exposure to Greece go to $120 billion euros from zero,” and that figure that is expected to grow. The same period had also seen foreign banks lowering their Greek holdings to 45.5 billion euros from 68 billion.
Financial markets initially rallied as the terms of the new plan were announced, with the euro rising to a two-week high against the dollar, going as high as $1.4440 before steadying around $1.4409. The deal was greeted with “enthusiasm and relief” in Ireland, as it is seen as a “vital lifeline” at a time when the country faces “least three more years of austerity and little room for domestic growth.”
But Greece’s economic troubles have led to fears in Cyprus, which has been reeling after “the worse peacetime military disaster on the holiday island.” On July 11, confiscated Iranian munitions stored at a navy base exploded, killing thirteen people including six firefighters and seven armed services personnel. The explosion destroyed the island’s largest power plant at Vasilikos; the plant had provided more 50 percent of the national grid’s total electricity supply and Cyprus is now experiencing rolling blackouts. The government expects zero economic growth this year at best. The Greek debt crisis has also led to rising skepticism in Serbia about its project plans to join the euro zone.
Indeed, after just one day, the initial “euphoria” about the bailout package has already subsided to reality on Friday night, as the Guardian reports. One leading investment strategist said that the deal is “less sticking plaster and more of a proper bandage,” with the further warning that “underlying problems in the Greek economy had not been addressed.” Some of the measures announced still must be voted on in countries throughout the 17-nation euro zone. Investors are voicing concerns about whether the bailout package is big enough to tackle the eurozone’s sovereign debt crisis — if it’s just another stopgap measure on the way to a bigger crisis.
Related Care2 Coverage