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A beggar with a cardboard sign saying “I’m hungry” in central Athens on Tuesday. (AFP)
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Brussels, Feb. 21: Greece finally secured its second giant bailout early today after euro zone finance ministers agreed to save it from bankruptcy in exchange for severe austerity measures and strict conditions.
After more than 13 hours of talks, the ministers approved a new bailout of 130 billion euros, or $172 billion, under which private investors in Greek debt will take even steeper losses than expected to help stave off the country’s imminent default.
“We have reached a far-reaching agreement on Greece’s new programme and private-sector involvement,” Jean-Claude Juncker, the Prime Minister of Luxembourg, announced this morning.
The agreement could be a new turning point in the European debt crisis, which has raised questions about the viability of the euro itself.
Though the outcome had been predicted, the meeting in Brussels proved more gruelling than expected as euro zone countries, the European Central Bank and the IMF wrestled through the night over a discrepancy in the amount of Greece’s debt to be reduced.
Under the bailout terms, which were not finalised until after 5am today, Greece will reduce its debt to about 120.5 per cent of its gross domestic product by 2020, from about 160 per cent now. Achieving a deal with that goal proved difficult because the steady deterioration of public finances in Athens have left the country’s creditors with problems in making the figures for the new bailout add up.
After several rounds of tough talks, representatives of banks that hold Greek bonds, who had agreed in October to take a 50 per cent loss on the face value of their bonds, agreed to take a 53.5 per cent loss on the face value, the equivalent to an overall loss of around 75 per cent.
Meanwhile Greece will pay lower interest rates on its bailout loans, and the European Central Bank agreed to give up profits from Greek bonds bought at a discount, and to pass those gains back to the government in Athens. This will be done via euro zone member countries because of the Central Bank’s regulations.
Stricter rules on euro zone debt and budget deficits are already in place, and next week European leaders are expected to agree on a new, higher firewall for euro bloc countries that get into financial trouble, a step that policy makers hope will signal the beginning of the end of the crisis.
The talks yesterday addressed the firewall issue, though only briefly. A new, permanent fund of 500 billion euros, or $660 billion, called the European Stability Mechanism, is due to come into existence in July, and one way of bolstering its power would be to run it alongside the current, temporary, rescue fund, the European Financial Stability Facility.
The bailout, with a stronger firewall, could provide the euro zone with some much-needed momentum. The injection of liquidity into the banking sector by the European Central Bank late last year — with the tacit support of Germany — had started to convince critics that there was a determination to save the currency.
Yet only last week the Greek bailout appeared to hang in the balance when rumours circulated that Germany’s finance minister, Wolfgang Schäuble, was willing to contemplate a Greek default.
As tempers flared, the Greek finance minister, Evangelos Venizelos, suggested that some people were trying to drive his country out of the euro zone.
It remains unclear whether a default was contemplated seriously or merely floated as a means of pressuring Athens.
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