Euro-area finance ministers freed up part of Greece’s second rescue package, setting the stage for the entire 130 billion-euro ($170 billion) bailout to proceed after investors agreed to take losses on the nation’s debt.
Greece won final approval yesterday of 35.5 billion euros in public funds and an endorsement of its debt swap with private creditors, which includes the use of so-called collective action clauses. The decision allows the bond swap to close this month as planned with as much as 30 billion euros in public sweeteners.
The finance chiefs are scheduled to meet in Brussels on March 12 to review the Greek aid program. They’ll also discuss Portugal’s current aid package, Spain’s financing outlook and a European Central Bank Executive Board vacancy. German Finance Minister Wolfgang Schaeuble said the group will make a decision on releasing the bulk of Greece’s second rescue.
Greece “has fulfilled the preconditions, but the harder part is still ahead: it must prove that the program can be met, return to economic growth and regain solvency,” Estonian Finance Minister Jurgen Ligi said in an e-mailed response to questions.
The debt exchange has played a central role in the euro area’s efforts to contain the sovereign debt crisis. To secure the next aid package, Greece needed to complete the swap and commit to making structural changes to its economy.
Greece’s long-term foreign and local currency issuer default ratings were downgraded to “Restricted Default” from “C,” Fitch Ratings said yesterday. The decision followed the Greek government’s announcement, endorsed by the euro area ministers, that investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after collective action clauses are triggered.
The Greek Cabinet later yesterday approved use of the clauses to impose losses on all holders of Greek-law bonds involved in the exchange.
Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro-region finance chiefs, said Greece has “the necessary conditions” in place to launch the procedures required for final approval of the rescue. He welcomed a report from European and International Monetary Fund officials on Greece’s efforts.
IMF Managing Director Christine Lagarde said yesterday she plans to recommend a 28 billion euro ($36.7 billion) contribution to the Greek rescue. That amount, which includes 9.7 billion euros that remained from a previous support package approved in May 2010, is subject to approval by the Washington-based agency’s executive board.
In addition to the money for the sweeteners, European ministers 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 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.
The 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.
“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 Greek government said it planned to 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.