By James G. Neuger and Jonathan Stearns - Feb 21, 2012 2:57 PM GMT+0700
Feb. 21 (Bloomberg) -- Debt-stricken Greece won a second bailout after European governments wrung concessions from private investors and tapped into European Central Bank profits to shield the euro area from a precedent-setting default. David Tweed reports from Brussels on Bloomberg Television's "Countdown" with Linzie Janis and Owen Thomas. (Source: Bloomberg)
Feb. 21 (Bloomberg) -- Carsten Brzeski, an economist at ING Group, talks about the agreement to award Greece 130 billion euros ($173 billion) in aid. He speaks from Brussels with Caroline Hyde on Bloomberg Television's "First Look." (Source: Bloomberg)
Feb. 21 (Bloomberg) -- European Central Bank President Mario Draghi talks with reporters in Brussels about the agreement reached on a second bailout for Greece. (Source: Bloomberg)
Debt-stricken Greece won a second bailout after European governments wrung concessions from private investors and tapped into European Central Bank profits to shield the euro area from a precedent-setting default.
Finance ministers awarded 130 billion euros ($173 billion) in aid, engineered a central-bank profits transfer and coaxed investors into providing more debt relief in an exchange meant to tide Greece past a March bond repayment. The euro was little changed at 7:50 a.m. in London after earlier strengthening by as much as 0.4 percent against the dollar, as analysis by the International Monetary Fund and European officials suggested Greece’s debt may still balloon to 160 percent of gross domestic product in a worst-case scenario.
Bondholders’ response to the swap, Greece’s tolerance of more austerity and a gantlet of parliamentary approvals in northern European countries gripped by an anti-bailout mindset loom as risks to the latest salvage operation.
“Everybody understood that this was the moment of truth,” Belgian Finance Minister Steven Vanackere told reporters early today after 13 1/2 hours of talks in Brussels.
The assistance brings to at least 386 billion euros the sums spent or committed to save Greece, Ireland and Portugal from bankruptcy, and to insulate Europe from a ruinous financial cascade that might endanger the 13-year-old monetary union.
The euro traded at $1.3236, down 0.1 percent on the day, after trading as high as $1.3293 earlier. In Asia, stocks pared losses and Treasuries retreated. The MSCI Asia Pacific Index of equities was down 0.4 percent as of 2:33 p.m. in Tokyo, after dropping as much as 0.7 percent earlier in the day. Yields on benchmark 10-year U.S. notes rose 3 basis points to 2.04 percent.
Fiscal Emergencies
European officials also held out the prospect of boosting the backstop for future fiscal emergencies to 750 billion euros from a planned limit of 500 billion euros when a permanent aid fund is paired with the temporary fund starting in July.
Luxembourg Prime Minister Jean-Claude Juncker, chairman of the overnight talks, predicted that a March 1-2 summit will deliver a “significant reinforcement of the euro-area firewall.” Germany, Europe’s dominant economy, has eased its opposition to raising the aid ceiling.
Euro leaders point to declining bond yields in Italy and Spain as evidence that investors are less fearful that the turmoil originating in Greece, representing 2.4 percent of the continental economy, will spill across borders.
Greece met a key condition for aid by spelling out 325 million euros in additional spending cuts, the latest of the unpopular measures that have provoked street protests in Athens.
‘Accident-Prone’
Still, the odds that Greece will remain encumbered by debt were illustrated by an analysis by European and IMF experts that highlighted what could go wrong with a country unable to grow out of its fiscal woes by devaluing its currency. “Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it,” the analysis said.
Finance chiefs’ starting point yesterday was the baseline European-IMF estimate, which put Greek debt at 129 percent of GDP in 2020. By lowering Greece’s bailout loan rates and extracting more from private investors and the central banks, they whittled that figure to 120.5 percent, a level deemed “sustainable” by the IMF.
‘Keep Coming Back’
“Does this alleviate the risk of imminent default?” said Callum Henderson, global head of foreign-exchange research in Singapore at Standard Chartered Plc. “Yes, but not further out. Further out, the concerns of a default will keep coming back.”
While a euro-zone statement spoke of a “significant contribution” from the IMF to the three-year loan package, it was unclear whether the fund would stick to its practice of delivering a third of the aid money.
“Significant means lots of things,” said IMF Managing Director Christine Lagarde, who was French finance minister when the crisis broke. She said an IMF decision in March on its Greek contribution will hinge on Europe’s progress in building a broader firewall.
Greek Prime Minister Lucas Papademos traveled to Brussels to lead the bargaining with the bondholders, represented by Charles Dallara and Jean Lemierre of the Institute of International Finance.
That give-and-take harked back to an earlier nocturnal episode in the crisis, when Dallara in October bowed to pressure from leaders including German Chancellor Angela Merkel to consent to a 50 percent cut in the face value of Greek bondholdings.
‘Unique Circumstances’
The bank representatives leave Brussels with that writeoff up to 53.5 percent. In a statement, they said that “the unprecedented nature of the package underpinning the consensual resolution of debt-restructuring discussions with Greece reflects the exceptional and unique circumstances.”
Governments agreed to earmark their share of profits from the ECB’s crisis-driven purchases of Greek bonds at discounted prices for the Greek package. National central banks’ future profits from holding Greek bonds in their investment portfolios also will be funneled into the program.
ECB President Mario Draghi hailed the “very good agreement,” while declining to comment on the central-bank profits.
“We welcome the commitment of the Greek government to undertake the actions to restore growth and stability,” Draghi said. “We also welcome the commitment of euro member countries to keep on helping Greece to come back on the path of growth and job creation.”
State Assets
Frustrated with Greece’s inability to meet two years of targets for cutting the deficit and selling off state assets, donor countries also insisted on more control over how Greece spends the money.
A special account will be set up that gives priority to keeping Greece solvent before releasing money for the country’s budget. A European Commission task force will also embed in Greece in an “an enhanced and permanent presence on the ground” to improve the workings of the Greek bureaucracy, according to the statement.
“We underestimated the challenge stemming from weak administrative capacity and also weak political unity,” European Union Economic and Monetary Commissioner Olli Rehn said. “Now both of these challenges are being addressed.”
Since Greece’s fiscal woes erupted in late 2009, creditor countries and the government in Athens have sought leverage over each other. Rich countries led by Germany tied aid to ever- stricter conditions, while Greece played on Europe’s fear that a default would destabilize the euro.
To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Jonathan Stearns in Brussels at jstearns2@bloomberg.net.
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
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