Euro-area finance ministers freed 35.5 billion euros ($47 billion) of aid for Greece and backed the country’s debt swap with private creditors, including the use of collective action clauses.
The decision, made by ministers on a conference call today, allows the bond swap to close this month as planned with as much as 30 billion euros in public sweeteners, Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-region finance chiefs, said in an e-mailed statement. They also released 5.5 billion euros for Greek interest payments and said Greece was on track to win the rest of its bailout funds.
“The necessary conditions are in place to launch the relevant national procedures required for the final approval of the euro area’s contribution to the financing of a second Greek rescue package,” Juncker said. He welcomed a report from European and International Monetary Fund officials on Greece’s efforts and said the ministers expect a “significant contribution” from the IMF in the new package.
Euro leaders have hailed the debt exchange as a central element in their efforts to contain the sovereign debt crisis and get Greece’s economy back on track. IMF Managing Director Christine Lagarde said yesterday that the crisis, had it remained unchecked, could have done more damage to the global economy than the financial market collapse of 2008.
The debt swap and second rescue package may not cure Greece’s long-term debt woes, said Charles Wyplosz, director of the Geneva-based International Center for Money and Banking Studies. The debt swap aims to reduce Greece’s debt burden by more than 100 billion euros and lower debt to 120.5 percent of gross domestic product by 2020.
“We still don’t have a solution for Greece, so there will be a harder default to come,” Wyplosz said. “Greece can’t grow with this kind of debt so something more has to give.”
The euro-area ministers are scheduled to meet in Brussels on March 12 to discuss further elements of Europe’s crisis-fighting efforts, including whether and how to increase the firewall provided by the euro area’s rescue funds. German Finance Minister Wolfgang Schaeuble said that ministers will decide on the main Greek aid package at that meeting.
‘Only a Foundation’
While the participation rate in the swap was “very heartening,” it remains decisive that Greece now carries out the necessary economic reforms, he said. “Naturally, this is only a foundation that’s been laid,” he told reporters in Berlin.
The International Swaps and Derivatives Association’s determinations committee meets in London today to weigh whether the use of the collective action clauses is a credit event that will trigger the swaps. Schaeuble said that decision won’t affect Greece’s aid.
Juncker said today that ministers had been told Greece would use collective action clauses on bonds governed by Greek law and that finance ministers were encouraged by “high private-sector participation” in the swap. The ministers said participation could rise further during a sign-up extension for bonds governed by foreign law.
The debt swap operation has been a “resounding success,” said Amadeu Altafaj, a spokesman for economic and monetary affairs commissioner Olli Rehn, to reporters in Brussels today.
The Greek government said today it will reach its target for the debt restructuring, with investors holding 95.7 percent of eligible bonds taking part. The government’s figure includes using the clauses to enforce participation, a move that may trigger insurance payouts under rules governing credit-default swap contracts.
In the exchange, investors will receive new bonds with a face value of 31.5 percent of the old ones together with notes from the European Financial Stability Facility. The new debt is governed by English law and comes with warrants that will provide extra income in years when Greek economic growth exceeds thresholds. The net present value loss for investors is more than 70 percent.
If the swaps do get triggered, it probably won’t roil financial markets, Italy’s deputy finance minister, Vittorio Grilli, told Bloomberg News today.
“I think it’s in the market already,” Grilli said. “It is not that it will be taking anyone by surprise. So I think a lot of these events are already priced in.”