Brussels, 21/02/2012 (Agence Europe) - It took all night. In the small hours of Tuesday 21 February, eurozone finance ministers came to a political agreement on the second financial rescue package for Greece. The bailout consists of public aid of €130 billion and voluntary restructuring of Greek debt, which will involve both public and private creditors, the latter having even agreed to a bigger haircut on their Greek securities than foreseen. Athens is to implement a number of priority measures by the end of February and rapidly trigger the debt restructuring operation. Any action undertaken will be subject to heightened monitoring, with an enhanced and permanent presence of the Commission's taskforce on the ground. In early March, there will be a new inventory of progress made in the second Greek programme.
“We have reached a far-reaching agreement on Greece's new programme and private-sector involvement that would lead to a significant debt reduction for Greece and pave the way towards an unprecedented amount of new official financing being provided by the EFSF … to secure Greece's future in the euro area”, said Jean-Claude Juncker as day broke on Tuesday 21 February. According to the Eurogroup president, Athens will have the “time necessary” for improving its public finance situation and for reforming its economy, in the aim of getting back on the road to growth. The Greek economy will nonetheless still be in recession this year, will stagnate in 2013 and is expected to get back to growth in 2014, hopefully with 2% GDP growth.
The Greek prime minister, Lucas Papademos, welcomed what he called a “historic” day for Greece. Commissioner for Economic and Monetary Affairs Olli Rehn said the agreement is a key element of the European response for addressing the sovereign debt crisis. “Today's deal is a key remaining building block of our comprehensive crisis response and with this agreement we have a real chance to turn the corner and move from stabilisation to boosting sustainable growth and job creation”, said Rehn. According to Mario Draghi, ECB President, “it is important for the main Greek political forces to take the programme on board” and for its implementation to be adequately monitored. Christine Lagarde, Director General of the IMF, said she would present the agreement to the members of the international organisation during the second week of March on condition that Greece implements the “priority action” that it has pledged to undertake by the end of February. On Tuesday morning, the president of the European Commission, José Manuel Barroso, welcomed the fact that the agreement closes the door on “uncontrolled default”, which would have plunged Greece into “chaos”, to take up comments made by Papademos. Aware of the heavy social cost of reform, he said that reform had nevertheless been necessary for a long while. The Danish minister for the economy, Margrethe Vestager, also welcomed the agreement which, she said, will allow stabilisation not only of the Greek economy but also of the European economy.
Private sector involvement (PSI). The second Greek bailout plan involves private sector involvement (PSI) and official sector involvement (OSI) in the partial restructuring of the Greek debt. Jean-Claude Juncker spoke of the “very substantial contribution” made by those sectors. In particular, this includes a haircut of 53.5% and there are several elements of PSI which will reduce the Greek public debt to the level of 120.5% of GDP by 2020, a level very close to the 120% required by the European Council. “In order to reach this level and to ensure that the financing of the official sector is limited to €130 billion during the programme period, we needed several hours of negotiations, and that was the main task of tonight obviously”, admitted Rehn. He stressed the unique nature of PSI for restructuring the Greek debt in order to isolate the Greek case from the two other countries under the EU/IMF programme (Portugal and Ireland). Lagarde spoke of the “significant progress” made after 13 hours of talks: - the Greek debt/GDP ratio has gone from 129% to 120.5% and public aid required will not exceed €130 billion. The IMF's contribution to the Greek programme, described as “substantial” by the Eurogroup (see our document), has not yet been made known but its proportion compared to the overall envelope could be considerably reduced.
Loans will be made to Greece from the European Financial Stability Facility (EFSF), while the first Greek programme was based on exclusively bilateral lending. Out of the €130 billion promised, €30 billion will be for enhancing the new securities that private creditors will receive, €5.5 billion will be for the payment of interest on securities reaching maturity, and €35 billion will be used to guarantee the national central banks' system during the period of debt exchange when Greece will be considered in partial default, said EFSF Executive Director Klaus Regling. A further €23 billion will be deployed “where necessary” to recapitalise Greek banks.
In coming days, Greece will launch its offer for the exchange of bonds, Juncker said, expecting a “high level of participation from the private sector”. Interest rates fixed for the new securities will be as follows: “2% until 2014, 3% between 2015 and 2020, and 4.3% after that”, he added.
The Greek authorities announced that they would legislate so that collective action clauses would be built into securities governed by Greek law. These clauses could be activated to force unwilling creditors to accept the conditions of the debt swap. The financial transaction should be completed by the deadline of 20 March, on which date Greece has to repay almost €15 billion to its creditors.
OSI. To ensure that the Greek debt trajectory is sustainable, institutional creditors have agreed to make further efforts. The 16 agreed once again to a 1.5% reduction in interest rates on the loans granted to Greece under the first programme (€73 billion of the planned €110 billion have already been allocated). This measure is expected to save Athens €1.4 billion (a reduction of the debt to GDP ratio of 2.8%). National central banks holding Greek securities have also agreed to forego the capital gains accrued on their securities between now and 2020, a further saving of €1.8 billion (a 1.8% reduction in the debt to GDP ratio). It is here that the European Central Bank, which has quietly been transferring its Greek securities worth €40 billion to national central banks, is expected to take part in the efforts being asked of creditors. Draghi made no comment on this.
Reforms. In exchange for this unprecedented financial aid, Greece will have to implement a draconian package of budgetary and macro-economic reforms. At the start of February, its parliament voted to accept the austerity measures (see EUROPE 10552). Among the measures are a 22% reduction in the minimum salary in the private sector, and 15,000 civil servant job losses in 2012 (150,000 by 2015). “This is the least difficult route for the Greeks”, said Rehn, who believes that for too long the country has lived above its means, as is witnessed by its high unit labour costs. Unemployment, which has doubled since 2009, from 9% to 18% of the active population, is likely to remain at this level until the end of the decade. To offset the high social cost of the austerity programme, no further tax levies are planned until 2014, so long as Greece abides by its commitments.
Other measures are designed to boost competitiveness as Greece will only get out of the hole if it returns to growth. A number of regulated professions will be opened up to competition. The fact that prices are continuing to rise despite the deep recession will be analysed in detail. Greece will also set up a system of tax collection worthy of the name in order to address widespread tax evasion. Privatisation will bring in €19 billion by 2015, not the €50 billion called for previously.
Closer monitoring. The European Commission has been charged with “significantly” strengthening its taskforce, which will now have a permanent presence in Athens. National experts will swell the ranks of this team. The Commission will also beef up its capacity for monitoring implementation of the second programme, including within the Greek Finance Ministry. Barroso also said that he would send experts in tackling youth unemployment to Athens next week. “In order to enhance the implementation of the programme, we also decided to create a segregated account through which Greece will pay an amount of the coming quarter's debt service which will certainly give strength to policy conditionality”, said Rehn. (MB/transl.jl/rt)