The Eurogroup of finance ministers declared that “ensuring debt sustainability and restoring competitiveness” are the goals of the second bailout for Greece which received the seal of approval last Tuesday following marathon talks.
The unspoken aim of the new bailout deal is to ensure there will be no chaotic default on 20 March, when a 14.4 billion euros bond repayment falls due.
The package envisages pain on all sides: for Greece, for the private-sector lenders to Greece, and for the official lenders to the country, such as the European Central Bank.
As before, the ambition is to reduce Greece’s debt-to-GDP ratio from its current level of 160 per cent to roughly 120 per cent by 2020. The new package follows the Greek parliament’s recent approval of an extra 325 million euros of spending cuts – including deep cuts to pension payments – to fill a gap in the 3.3 billion euros of extra budget savings this year which the EU and IMF had demanded. There are six main elements of last Tuesday’s agreement:
1. Greece will have to accept non-Greek inspectors in Athens. According to a statement issued after the meeting, European monitors will move into Athens for “an enhanced and permanent presence on the ground in Greece”.
2. The Greek government will have to service its debts from a special, separate account, depositing sums in advance to meet payments that fall due in the following three months. This operation will be supervised by the so-called troika: the International Monetary Fund, the European Union and the European Central Bank.
This arrangement reflects lenders’ deep scepticism about the Greek government’s ability, or willingness, to stick to the austerity programme and meet spending targets. So, too, does the demand that Greece rewrites its constitution to give priority to debt servicing.
3. Deeper losses for the private-sector holders of Greek bonds is the biggest surprise in the deal. Last October the private debtors agreed to accept a 50 per cent reduction on the face value of their Greek IOUs; the “haircut” will now be 53.5 per cent, and in addition their replacement bonds will carry a lower interest rate than previously discussed: approximately 2 per cent for the first three years, 3 per cent for the next five years, and 4.2 per cent thereafter. This equates to a debt write-off of about 100 billion euros.
This PSI (private sector involvement) element was increased because reworked projections showed that Greece, even with a 130 billion euros bailout, would still fall short of the 120 per cent debt-to-GDP target by 2020.
The demand that bondholders should bear bigger losses was one of the sticking-points that turned the talks into a 14-hour meeting.
The private-sector bondholders (banks, insurers, pension funds and investment funds) are still only being “invited” on a voluntary basis to participate. But Charles Dallara of the Institute of International Finance, the chief negotiator for bondholders, appeared to accept when he said the package was “a fair deal for all parties”.
4. Greece’s official lenders (the European Central Bank, the eurozone’s bailout fund and the IMF) have agreed to cut the interest rate on existing bailout loans. Unlike private-sector holders, however, these official lenders will not suffer a haircut. For the time being at least, the real value of a Greek bond depends on the identity of the owner. For its part, the ECB says it will distribute to euro-member states any profits it makes by owning Greek bonds.
5. The IMF will pay a 130 billion euros bailout, or loan. The big unanswered question is exactly how much the IMF will cough up – the statement spoke only of “a significant contribution”.
The cash will not be handed over immediately. Instead, the Eurogroup ministers want to see if private-sector bondholders do indeed “volunteer”, as the deal sets out, for a sharper haircut than they had been expecting. The Eurogroup is also demanding that Greece give evidence of the legal framework that it will put in place to implement the “prior actions”, meaning spending cuts.
6. If the plan proceeds on schedule, the bailout will happen early next month, in time to meet the critical bond repayment on the 20th of the month.
