Europe opted yesterday to keep Greece in the eurozone, agreeing a huge financial lifeline worth €237 billion but demanding Athens meet a long list of conditions first.
The package is still contingent on changes to be implemented in Greece by the end of February
The decision, reached after a marathon 13 hours of negotiations with private creditors and the International Monetary Fund, should avert a messy bankruptcy, but leaves Greece facing years under European Union wardenship.
After weeks in which some in the single currency area raised the spectre of cutting Athens adrift, Italy’s Prime Minister Mario Monti said the agreement represented “a good result for Greece, the markets and the eurozone”.
Greek Prime Minister Lucas Papademos, who with European backing heads an emergency coalition government, pronounced himself “very happy”, after personally shuttling in and out of talks with top bankers.
Markets reacted with steady, if unspectacular advances. But economists injected a dose of scepticism, focusing on a giant task ahead of Greece to get its crushed economy growing again, and also casting wary eyes on other countries that could now face pressure – namely Portugal, but even France.
“Even with this agreement, most of Greece’s problems lie ahead of it, not behind,” said Brussels-based commentator Sony Kapoor.
Luxembourg Prime Minister Jean-Claude Juncker formally announced a deal shortly after 6 a.m. saying the “comprehensive blueprint” would “secure Greece’s future in the eurozone” and safeguard financial stability “throughout the eurozone”.
However, he spelled out a series of conditions – including a time-limited rewrite of the Greek constitution – to be met before eurozone governmental loans of “up to €130 billion until 2014” could be handed over.
The $310 billion bailout, obtained after €3.2 billion in spending cuts rammed through the Greek Parliament during violent protests, also depends on bond-holders agreeing to a deal to wipe 53.5 per cent off the paper value of privately-held Greek sovereign debt.
Negotiators for the banks said this should deliver €107 billion in cuts to Greece’s €350 billion total debts.
The eurozone will decide whether this exchange of devalued old bonds for new IOUs has been “successful” in early March, Mr Juncker said. The goal now is for Greece’s public debt to fall to 120.5 per cent of gross domestic product (GDP) by 2020, instead of the present 160 per cent of output.
Athens should, then, be relieved of the pressure to make debt repayments of about €14.5 billion on March 20. But the package is still contingent on changes to be implemented in Greece by the end of February – as well as the “permanent” presence of EU and IMF officials on the ground in Athens to run the rescue programme. Athens is expected to anchor in its constitution within two months legal provision for “ensuring that priority is granted to debt servicing payments”, in a bid to protect public lenders’ interests first.
European Central Bank (ECB) chief Mario Draghi noted that “the implementation of the agreement must be rightly monitored”.
The euro jumped more than one US cent on news of the deal, but later fell, while stocks were steady.
Markets appeared concerned that the wider eurozone picture remained unclear, with analysts notably expecting Portugal, another fragile euro state, to need a revised bailout later this year.
Berenberg bank analyst Christian Schulz raised questions about the stability of France, the European nation most heavily exposed to Greek debt.
Still, Britain’s Chancellor of the Exchequer George Osborne said the eurozone was “collectively standing behind their currency – which is something that Britain has urged them to do all along”.
“That’s been the crucial missing ingredient,” he added. Of as much interest to traders, meanwhile, would be moves, according to European Economic Affairs Commissioner Olli Rehn, to increase the effective lending capacity of the bloc’s wider financial firewall to €750 billion.
EU leaders will tackle this question at a March 1-2 summit. They would achieve that goal by merging the €500 billion contained in a new rescue fund to become operational in July with €250 billion left over in a temporary pot constructed in the wake of the first, failed Greek bailout.
IMF chief Christine Lagarde said it will fix its contribution to the revamped Greek bailout in the second week of March; under a €110 billion deal approved nearly two years ago, the Washington-based lender of last resort was responsible for roughly one third of cash loans.
G20 countries, who meet in Mexico later this week, are to mull a potential boost to IMF resources.
An EU-IMF report leading during the overnight talks showed that in the worst-case scenario, Greece would need a whopping €245 billion in bailout aid by 2020, eurozone sources said.