Eurozone leaders struck a deal with private banks and insurers yesterday for them to accept a 50 percent loss on their Greek government bonds under a plan to lower Greece’s debt burden and try to contain the two-year-old euro zone crisis.
The agreement was reached after more than eight hours of negotiations involving bankers, heads of state, central bankers and the International Monetary Fund (IMF). It aims to draw a line under spiraling debt problems that have threatened to unravel the European single currency project.
Under the deal, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece’s debt burden by 100 billion euros, cutting its debts to 120 percent of GDP by 2020, from 160 percent now. At the same time, the eurozone will offer ‘credit enhancements’ or sweeteners to the private sector totalling 30 billion euros. The aim is to complete negotiations on the package by the end of the year, so Greece has a full, second financial aid program in place before 2012.
The value of that package, EU sources said, would be 130 billion euros – up from 109 billion euros when a deal was last struck in July.
“The summit allowed us to adopt the components of a global response, of an ambitious response, of a credible response to the crisis that is sweeping across the eurozone,” French President Nicolas Sarkozy said.
EFSF war chest boosted
As well as the deal on deeper private sector participation in Greece – which emerged after Sarkozy and German Chancellor Angela Merkel engaged in the negotiations with bankers – eurozone leaders agreed to scale up the European Financial Stability Facility (EFSF), their 440 billion euro ($600 billion) bailout fund set up last year.
The fund has already been used to provide help to Ireland, Portugal and Greece, leaving around 290 billion euros available. Around 250 billion of that will be leveraged four to five times, producing a headline figure of around 1 trillion euros, which will be deployed in a variety of ways. Leaders hope that will be enough to stave off any worsening of the debt problems in Italy and Spain, the region’s third and fourth largest economies respectively.
The EFSF will be leveraged in two ways, either by offering insurance, or first-loss guarantees, to purchasers of eurozone debt in the primary market, or via a special purpose investment vehicle that will be set up in the coming weeks and which is aimed at attracting investment from China and Brazil.
The methods could be combined, giving the EFSF greater flexibility. “The leverage could be up to one trillion (euros) under certain assumptions about market conditions and investors’ responsiveness in view of economic policies,” said Herman Van Rompuy, the president of the European Council.
As with the July 21 agreement, which quickly broke down when it became difficult to secure sufficient private sector involvement and market conditions rapidly worsened, the concern is that yesterday’s deal will only work if the fine print can be promptly agreed with the private sector, represented by the Institute of International Finance (IIF).
Charles Dallara, the managing director of the IIF, said those he represented were committed to making the deal work. “The IIF agrees to work with Greece, euro area authorities and the IMF to develop a concrete voluntary agreement on the firm basis of a nominal discount of 50 percent on notional Greek debt held by private investors with the support of a 30 billion euro official … package,” he said in a statement. “The structure of the new Greek claims will need to be based on terms and conditions that ensure (net present value) loss for investors fully consistent with a voluntary agreement.”
Eurozone leaders will be hoping that the agreement, which will also be accompanied by a recapitalization of the European banking sector by around 106 billion euros, will finally draw a line under a crisis that has roiled financial markets and threatened to tear apart the euro project.
The eurozone leaders also called on Italy to take rapid action on pension reforms and other structural measures to try to avoid the economy heading the same way as Greece.
Prime Minister Silvio Berlusconi has promised to raise the retirement age to 67 by 2026, and pursue other adjustments to the country’s economic model, steps the EU praised but said would only be positive if they were implemented.