Eurozone finance ministers have approved the second program to save Greece from bankruptcy, worth 130 billion euros, but the package includes in particular measures which makes a priority paying the debt to creditors, money to capitalize banks and closer supervision of Greek finances use. The plan does not touch such issues as boosting economic growth, but on the contrary, is subject to harsh austerity measures that may sink the Greek economy in deep recession, and analysts fear that Greece will need another rescue program.
After nearly 14 hours of discussions and negotiations, finance ministers approved a funding of 130 billion euros for Greece and a plan to reduce the state debt to 120.5% of GDP by 2020 from 160% of GDP at present. A debt level of 120.5% of GDP is very close to the threshold considered by IMF acceptable and sustainable, writes The Wall Street Journal. The agreement is accompanied by a conversion scheme of Greek bonds held by private investors in securities with longer maturities.
Greece’s private creditors have accepted losses by 53.5% of the nominal value of bonds held, equivalent to over 100 billion euros. There was initially negotiated a discount of 50%, which amounted to a loss of approximately 70% of present value of claims. Bonds of 14.5 billion euros which should have redeemed by the Greek government on March 20 will be restructured, and the state will avoid the default.
The conversion of the bonds will be carried out between March 8 to 11.
Third bailout to follow?
A debt sustainability analysis for Greek officials prepared for the euro area and obtained by Financial Times shows that, under the most optimistic scenario, austerity measures imposed to Athens are likely to sink the country into a recession so deep, that Greece will not bring its debt to a sustainable level even with the second bailout package of 170 billion euros. The analysis warns that the two principles of the new rescue program are destructive.
The forced austerity will only lead to an increased debt and the weakening of the economy and the 200 billion euro restructuring of debt will scare investors and will block the access of Greece to international financial markets. The report suggests that the Greek debt might decline more slowly than bailout’s designers hoped, to only 160% of GDP in 2020. In this scenario, Greece will need 240 billion euros in financial aid.
“The Greek authorities might not be able to manage the implementation of structural reforms and structural policies in the pace set in the baseline scenario”, the analysis reads, stating several problems which could hit the bailout of Greece. Borrowing to recapitalize Greek banks, initially estimated at 30 billion euros, now amounts to 50 billion euros and the Greek privatization program, which according to initial plans would have to bring in 50 billion euros to the budget, could be extended by five years to bring only 30 billion euros by 2020. The analysis suggests that Greek bond exchange program, funded by Greece and the eurozone rescue mechanisms, is virtually creating a privileged class of investors that will ward off potential new investors when Greece will try to return to the bond market.
Nothing for the economy
The agreement does provide “virtually nothing” to support the Greek economy, which could return to growth only after 10 years, says Thomson Reuters. Reducing wages as a result of austerity measures will worsen the recession, making the debt burden, although small, very difficult. Instead, finance ministers agreed for the European Commission to have a presence “consolidated and permanent” in Greece to better monitor the economic performance.
Everything for the debt
On the new bailout package for Greece, European Central Bank (ECB) will participate by distributing profits for Greek bonds held by the national banks in the eurozone and with this money the governments will finance the Greek state. The ECB has so far bought the Greek sovereign bonds on the secondary market now worth 45-50 billion, analysts estimated. Also, profits related to Greek bonds worth 12 billion euros held by the eurozone central banks will be transferred to Greece, which will reduce state debt by 1.8 billion by 2020.
Most of the 130 billion euros available to Greece under the agreement will be used to finance the conversion of bonds and guarantee the stability of the Greek banking system, says Thomson Reuters. About 30 billion euros will be distributed as “incentives” for private lenders to get them to participate in the scheme of redemption of bonds. 23 billion euros are for Greek banks recapitalization. The actual financing of bond conversion will require funding of 35 billion euros from the package. The default of Greece would trigger Credit Default Swaps for debt holders.
Greece has agreed to contribute with the appropriate funds for debt service bill in the next quarter in a special account and amend the constitution to make debt repayment a priority. IMF, concerned about its high exposure to the eurozone countries will likely support Greece this time with a minimal contribution. European officials expected last week a participation of 13 billion euros to the new bailout, compared with 30 billion euros in the first program of 110 billion euros.
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