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Eurozone Reaches Deal On Greek Bailout

Eurozone Reaches Deal On Greek Bailout
2/21/2012 12:14 AM ET

Eurozone Finance Ministers early Tuesday gave a green signal to a second rescue package for Greece, unlocking a 130 billion euros bailout money for the cash-strapped euro member. Ensuring debt sustainability and restoring competitiveness are the main goals of the new program, the Eurogroup said.

The meeting also agreed on a debt reduction target of 120.5 percent of GDP by 2020, instead of the previous 120 percent.

The new bailout money would leave Athens with sufficient funds to repay a 14.5 billion euros bond due on March 20.

Eurogroup chairman Jean-Claude Juncker said under the debt swap agreement, Greece's private sector creditors will write off 53.5 percent of the nominal value of their Greek debt holdings. This was slightly more than the previously announced 50 percent.

The debt exchange plan aims to reduce the euro member's debts by around 100 billion euros. Juncker said the bailout amount would be paid by the euro area and the International Monetary Fund until 2014. He also said debt-swap bonds would have a coupon of 2 percent in 2014, rising to 3 percent in 2015- 2020 and to 4.3 percent thereafter.

"The official sector will decide on the precise amount of financial assistance to be provided in the context of the second Greek program in early March, once the results of PSI are known and the prior actions have been implemented," the Eurogroup said in a statement.

Greece has already availed a joint EU-IMF 110 billion euros- rescue loan in May 2010, out of which about 73 billion euros have been given to Athens in installments. Greece's debt to GDP ratio currently stands at around 160 percent of GDP, the highest in euro area. The economy contracted for a seventh consecutive quarter in the fourth quarter of 2011, with the gross domestic product plunging 7 percent annually during the period.

On February 12, Greek lawmakers approved a highly unpopular package of austerity measures amid nationwide protests as demanded by its international creditors.

In a statement, the Eurogroup welcomed the approval of the policy package by the Greek parliament and the identification of additional structural expenditure reductions of 325 million euros to close the fiscal gap in 2012.

The Eurogroup said the income generated by the Eurosystem holdings of Greek Government bonds would contribute to the profit of the European Central Bank and of the National Central Banks. The ECB's profit will then be disbursed to the national central banks, who will disburse the profits to euro area member states.

During the meeting, all member states have agreed to an additional retroactive lowering of the interest rates of the Greek Loan Facility so that the margin amounts to 150 basis points. There will be no additional compensation for higher funding costs.

This is expected to bring down the debt-to-GDP ratio in 2020 by 2.8 percentage points and lower financing needs by around 1.4 billion euros over the program period. The Eurogroup urged that the national procedures for the ratification of this amendment to the Greek Loan Facility Agreement should be urgently initiated so that it can enter into force as soon as possible.

The Eurogroup further said that governments of member states where central banks currently hold Greek government bonds in their investment portfolio must pass on to Greece an amount equal to any future income, accruing to their national central bank stemming from this portfolio, until 2020.

These income flows are expected to help reducing the Greek debt ratio by 1.8 percentage point by 2020 and are estimated to lower the financing needs over the program period by approximately 1.8 billion euros.

by RTT Staff Writer

For comments and feedback: editorial@rttnews.com

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