Debt-stricken Greece won a second bailout after European governments wrung concessions from private investors and tapped into European Central Bank profits to shield the euro area from a precedent-setting default.
Finance ministers awarded 130 billion euros ($173 billion) in aid, engineered a central-bank profits transfer and coaxed investors into providing more debt relief in an exchange meant to tide Greece past a March bond repayment. Stocks fell and the euro fluctuated as investors speculated the deal won’t fix Greece’s long-term challenges.
Bondholders’ response to the swap, Greece’s tolerance of more austerity and a gantlet of parliamentary approvals in northern European countries gripped by an anti-bailout mindset loom as risks to the latest salvage operation.
“Everybody understood that this was the moment of truth,” Belgian Finance Minister Steven Vanackere told reporters early today after 13 1/2 hours of talks in Brussels.
The assistance brings to at least 386 billion euros the sums spent or committed to save Greece, Ireland and Portugal from bankruptcy, and to insulate Europe from a ruinous financial cascade that might endanger the 13-year-old monetary union by dragging down Spain or Italy.
The accord initially lifted the 17-nation euro by as much as 0.4 percent against the dollar before it slipped amid speculation the latest pact won’t solve Greece’s debt woes. The single currency rebounded to $1.3283 as of 10:03 a.m. in Brussels, up 0.3 percent. European stocks retreated from a six-month high.
Tests and questions remain. Unless 90 percent of investors sign up to the bond swap, Greece may need to use force to secure the debt relief, entering legal difficulties. Finland and Germany are among the nations whose lawmakers must back the new loans.
The International Monetary Fund also must decide how much it is willing to contribute to the package. Greece has to enact the prescribed austerity and economic reforms that could prove too much to deliver amid a fifth year of recession, and risk falling foul of social unrest and upcoming elections.
“Greece will find it difficult to shoulder even the reduced debt in the long-run if it does not implement far-reaching reforms,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “The probability will rise in the second half of the year that a frustrated EU stops payments to Greece.”
Seeking to limit contagion, European officials also held out the prospect of boosting the backstop for future fiscal emergencies to 750 billion euros from a planned limit of 500 billion euros when a permanent aid fund is paired with the temporary fund starting in July.
Luxembourg Prime Minister Jean-Claude Juncker, chairman of the overnight talks, predicted that a March 1-2 summit will deliver a “significant reinforcement of the euro-area firewall.” Germany, Europe’s dominant economy, has eased its opposition to raising the aid ceiling, which will be a topic in Mexico City this weekend when Group of 20 finance chiefs meet.
Euro leaders point to declining bond yields in Italy and Spain as evidence that investors are less fearful that the turmoil originating in Greece, representing 2.4 percent of the continental economy, will spill across borders.
Greece met a key condition for aid by spelling out 325 million euros in additional spending cuts, the latest round of the measures that have provoked street protests in Athens as unemployment tops 20 percent.
Still, the odds that Greece will remain encumbered by debt were illustrated by an analysis by European and IMF experts that highlighted what could go wrong with a country unable to grow out of its fiscal travails by devaluing its currency. “Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it,” the analysis said. Debt may rebound to 160 percent of gross domestic product, the same level as last year, it said.
Finance chiefs’ starting point yesterday was the baseline European-IMF estimate, which put Greek debt at 129 percent of GDP in 2020. By lowering Greece’s bailout loan rates and extracting more from private investors and the central banks, they whittled that figure to 120.5 percent, a level deemed “sustainable” by the IMF.
‘Keep Coming Back’
“Does this alleviate the risk of imminent default?” said Callum Henderson, global head of foreign-exchange research in Singapore at Standard Chartered Plc. “Yes, but not further out. Further out, the concerns of a default will keep coming back.”
While a euro-zone statement spoke of a “significant contribution” from the IMF to the three-year loan package, it was unclear whether the fund would stick to its practice of delivering a third of the aid money.
“Significant means lots of things,” said IMF Managing Director Christine Lagarde, who was French finance minister when the crisis broke. She said an IMF decision in March on its Greek contribution will hinge on Europe’s progress in building a broader firewall.
Greek Prime Minister Lucas Papademos traveled to Brussels to lead the bargaining with the bondholders, represented by Charles Dallara and Jean Lemierre of the Institute of International Finance.
That give-and-take harked back to an earlier nocturnal episode in the crisis, when Dallara in October bowed to pressure from leaders including German Chancellor Angela Merkel to consent to a 50 percent cut in the face value of Greek bondholdings.
The bank representatives leave Brussels with that writeoff up to 53.5 percent. In a statement, they said that “the unprecedented nature of the package underpinning the consensual resolution of debt-restructuring discussions with Greece reflects the exceptional and unique circumstances.”
Governments agreed to earmark their share of profits from the ECB’s crisis-driven purchases of Greek bonds at discounted prices for the Greek package. National central banks’ future profits from holding Greek bonds in their investment portfolios also will be funneled into the program.
ECB President Mario Draghi hailed the “very good agreement,” while declining to comment on the central-bank profits.
“We welcome the commitment of the Greek government to undertake the actions to restore growth and stability,” Draghi said. “We also welcome the commitment of euro-member countries to keep on helping Greece to come back on the path of growth and job creation.”
Frustrated with Greece’s inability to meet two years of targets for cutting the deficit and selling off state assets, donor countries also insisted on more control over how Greece spends the money.
A special account will be set up that gives priority to keeping Greece solvent before releasing money for the country’s budget. A European Commission task force will also embed in Greece in an “an enhanced and permanent presence on the ground” to improve the workings of the Greek bureaucracy, according to the statement.
“We underestimated the challenge stemming from weak administrative capacity and also weak political unity,” European Union Economic and Monetary Commissioner Olli Rehn said. “Now both of these challenges are being addressed.”
Since Greece’s fiscal woes erupted in late 2009, creditor countries and the government in Athens have sought leverage over each other. Rich countries led by Germany tied aid to ever-stricter conditions, while Greece played on Europe’s fear that a default would destabilize the euro.