BRUSSELS, July 22 The euro zone has built safeguards into its second financing package for Greece to cope with the risk that Greek debt will be temporarily downgraded to selective default, euro zone sources said.
Euro zone leaders agreed on Thursday to provide an extra 109 billion euros ($156 billion) in official financing to save Greece from bankruptcy. Private sector bondholders also agreed to swap some of their existing bonds for new debt issued on easier terms for Greece.
Fitch Ratings said on Friday it would declare Greece in restricted default on its debt during such a swap but would probably assign new ratings of a low speculative grade once a bond exchange is completed.
"The package has money to deal with the possibility that rating agencies may downgrade, for a short period of time, Greece to selective default. We are ready for that," one of the euro zone sources, involved in the negotiations process, said.
Total Greek financing needs until mid-2014 are 173 billion euros, of which 28 billion euros will come from Greek privatisation and 57 billion from the yet undisbursed part of the country's first bailout package from last year.
With 88 billion euros remaining to be financed, euro zone leaders agreed with private bondholders that governments, through the European Financial Stability Facility (EFSF), would provide 34 billion and the private sector would finance 54 billion in the period 2011-2014.
The International Monetary Fund will contribute although it is not yet clear how much or to which part of the new package. "As you know the IMF has its rules ... Greece has not yet at this point in time requested a programme," IMF chief Christine Lagarde said on Thursday, but added: "It is clearly the intention of the International Monetary Fund to be an active participant in this programme."
A euro zone official said on Friday the bloc hoped for the usual division of the IMF contributing one third, but realised the IMF might not participate in all elements of the package.
The private sector proposed that all Greek bonds maturing until the end of 2019 could be exchanged for new, 30-year paper, backed by AAA zero-coupon securities, and that some of the Greek debt could be bought back early.
The 30-year bonds will carry a coupon of 3.5 percent, the same as the European Financial Stability Facility bonds that will back them as credit enhancement.
In 2011-2014, the euro zone would put up almost 17 billion euros for this enhancement, effectively bringing the net private sector contribution for this period down to 37 billion euros.
The enhancement will cost the euro zone 35 billion euros over the full period of the exchange programme, to the end of 2019, and this is included in the new 109 billion euro official commitment to Greece.
For the proposed debt buy back, the euro zone agreed to allot 20 billion euros.
The net present value loss for banks from the deal, or effectively the haircut they proposed, is 21 percent, a euro zone official said.
The deal is likely to extend the average maturity of Greek debt close to 20 years from close to 7 years now.
However, if it triggers a ratings downgrade to selective default, Greek banks could not use their portfolios of Greek bonds as collateral in liquidity operations with the European Central Bank, threatening the whole Greek banking sector with collapse.
To address that problem, euro zone leaders agreed to allot 20 billion euros to recapitalise Greek banks.
The 34 billion in Greek deficit financing, 20 billion in debt buy back, 20 billion in Greek bank recapitalisation and 35 billion in credit enhancement for the Greek debt exchange agreed with private banks together adds up to 109 billion of official financing committed to by euro zone leaders on Thursday.
In addition to that, euro zone leaders agreed to provide up to 35 billion euros, from the EFSF, as collateral for Greek bonds used in ECB liquidity operations for the short period of time that the paper may be in selective default.
Since the selective default rating is expected to be a matter of days or a few weeks at the most, the enhanced collateral money is only a temporary measure.
"A letter to that effect to ECB President Jean-Claude Trichet was signed by the President of the Eurogroup Jean-Claude Juncker on Thursday," the first source said.
(Reporting by Jan Strupczewski; Editing by Ruth Pitchford)
($1 = 0.695 Euros)