Greece Update: The Bailout Deal Finally Gets Done, But...
After months of tough negotiations and a fair amount of hand wringing over the potential consequences of a deal not getting done, European Finance Ministers agreed to a second bailout package for Greece early Tuesday morning.
Belgian Finance Minister Steven Vanackere told reporters Tuesday this was a deal that had to get done. “Everybody understood that this was the moment of truth,” he said.
The key components of the second bailout include €130 billion (the equivalent of $172 billion at current exchange rates) in loans and a debt swap deal forcing private bond holders to take a loss of 53.5% on their current holdings.
The bailout program will allow Greece to avoid a “messy default” next month, when Athens must rollover tens of billions of euros in debt that comes due.
According to the Financial Times, the €130 billion in loan guarantees is intended to keep Greece afloat until 2014. However, the latest analysis shows that an additional €50 billion might be required to make it through the end of the decade.
The hotly debated debt swap deal with private sector investors (PSI) is designed to help Greece achieve a debt-to-GDP ratio of 120% by 2020. With the private bond holders agreeing to swap their current bonds for new ones, effectively taking a 53.5% haircut on their current debt securities, the projections are for Greece’s debt-to-GDP to hit 120.5% in 2020.
Recall that many reports had indicated that the haircut taken by the private sector would be significantly greater than 53.5%, with the consensus expectations being in the area of 70%. However, with the ECB and European banks not participating in any haircuts on their Greek debt holdings, it appears that the PSI were able to drive a better deal.
Reports indicate that while the ECB would not take part in the debt swap, the central bank has agreed to distribute its profits on current Greek debt. This represents a contribution of tens of billions of euros to the overall bailout package and helped finance ministers close the funding gap needed for the IMF to participate in the program.
According to Reuters, the agreement was hailed as a step forward for Greece. However, doubts immediately emerged as to whether it would do much more than deal with its most pressing debt problems.
The FT is reporting that according to debt projections prepared by the Eurozone finance ministers, Greece’s efforts to bring down its debt-to-GDP ratio are currently “way off track.” The paper suggests that Greece may need yet another bailout package once the second one runs out due to the fact that forced austerity will likely lead to an ongoing recession.
While the bailout deal was agreed to by the European finance ministers, the drama may not yet be over as Greece needs 90% of the current bond holders to voluntarily sign up for the debt swap deal.
In addition, both Finland and Germany will require their parliaments to approve the bailout.
Finally, the IMF will need to decide how much it is willing to contribute to the package. Recall that on Friday, there were reports that the IMF was only willing to contribute €13 billion to the Greek bailout due to the concerns of its members about the credibility of Greece’s government.
Thus, this drama is likely to go on and on.
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Posted on 2/21/2012 at 8:08 AM
