Euro zone, IMF secure deal on cutting Greek debt

BRUSSELS Tue Nov 27, 2012 5:27am EST

1 of 13. A Greek flag flutters in front of the moon in Athens November 26, 2012.

Credit: Reuters/Yorgos Karahalis

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BRUSSELS (Reuters) - Euro zone finance ministers and the International Monetary Fund clinched agreement on reducing Greece's debt on Monday in a breakthrough to release urgently needed loans to keep the near-bankrupt economy afloat.

After 12 hours of talks at their third meeting in as many weeks, Greece's international lenders agreed on a package of measures to reduce Greek debt by 40 billion euros, cutting it to 124 percent of gross domestic product by 2020.

In a significant new pledge, ministers committed to taking further steps to lower Greece's debt to "significantly below 110 percent" in 2022 -- the most explicit recognition so far that some write-off of loans may be necessary from 2016, the point when Greece is forecast to reach a primary budget surplus.

To reduce the debt pile, they agreed to cut the interest rate on official loans, extend their maturity by 15 years to 30 years, and grant Athens a 10-year interest repayment deferral.

"When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," German Finance Minister Wolfgang Schaeuble said.

Eurogroup Chairman Jean-Claude Juncker said ministers would formally approve the release of a major aid installment needed to recapitalize Greece's teetering banks and enable the government to pay wages, pensions and suppliers on December 13.

Greece will receive up to 43.7 billion euros in stages as it fulfills the conditions. The December installment will comprise 23.8 billion for banks and 10.6 billion in budget assistance.

The IMF's share, less than a third of the total, will only be paid out once a buy-back of Greek debt has occurred in the coming weeks, but IMF Managing Director Christine Lagarde said the Fund had no intention of pulling out of the program.

They promised to hand back 11 billion euros in profits accruing to their national central banks from European Central Bank purchases of discounted Greek government bonds in the secondary market.

They also agreed to finance Greece to buy back its own bonds from private investors at what officials said was a target cost of around 35 cents in the euro.

European Central Bank President Mario Draghi said on leaving the talks: "I very much welcome the decisions taken by the ministers of finance. They will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece."


Greek Prime Minister Antonis Samaras welcomed the deal.

"Everything went well," he told reporters outside his mansion at about 3 a.m. in the morning.

"Tomorrow, a new day starts for all Greeks."

However, the biggest opposition party, Syriza, dismissed the deal and said it fell short of what was needed to make the country's debt sustainable.

The euro strengthened against the dollar after news of the deal and commodities and Asian shares also rose.

Greece, where the euro zone's debt crisis erupted in late 2009, is the currency area's most heavily indebted country, despite a big "haircut" this year on privately-held bonds. Its economy has shrunk by nearly 25 percent in five years.

Negotiations had been stalled over how Greece's debt, forecast to peak at 190-200 percent of GDP in the coming two years, could be cut to a more sustainable 120 percent by 2020.

The agreed figure fell slightly short of that goal, and the IMF was still insisting that euro zone ministers should make a firm commitment to further steps to reduce the debt stock if Athens implements its adjustment program faithfully.

The key question remains whether Greek debt can become sustainable without euro zone governments having to write off some of the loans they have made to Athens.

Germany and its northern European allies have hitherto rejected any idea of forgiving official loans to Athens, but EU officials believe that line may soften after next year's German general election.


Schaeuble told reporters earlier that debt forgiveness was legally impossible, not just for Germany but for other euro zone countries, if it was linked to a new guarantee of loans.

"You cannot guarantee something if you're cutting debt at the same time," he said. That did not preclude possible debt relief at a later stage if Greece completed its adjustment program and no longer needs new loans.

At Germany's insistence, earmarked revenue and aid payments will go into a strengthened "segregated account" to ensure that Greece services its debts.

A source familiar with IMF thinking said a loan write-off once Greece has fulfilled its adjustment program would be the simplest way to make its debt viable, but other methods such as forgoing interest payments, or lending at below market rates and extending maturities could all help.

The German banking association (BDB) said a fresh "haircut" or forced reduction in the value of Greek sovereign debt, must only happen as a last resort.

The ministers agreed to reduce interest on already extended bilateral loans from the current 150 basis points above financing costs to 50 bps.

No figures were announced for the debt buy-back in an effort to avoid triggering a rise in market prices in anticipation of a buyer. But before the meetings, officials had spoken of a 10 billion euro buy-back, that would achieve a net reduction of about 20 billion euros in the debt stock.

German central bank governor Jens Weidmann has suggested that Greece could "earn" a reduction in debt it owes to euro zone governments in a few years if it diligently implements all the agreed reforms. The European Commission backs that view.

An opinion poll published on Monday showed the Syriza party with a four-percent lead over the Conservatives who won election in June, adding to uncertainty over the future of reforms.

(Additional reporting by Robert-Jan Bartunek, Ethan Bilby, Luke Baker in Brussels, Reinhardt Becker in Berlin; Writing by Paul Taylor; Editing by Luke Baker and Anna Willard)

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Comments (14)
kommy wrote:
What is a flip-side of creditors decision to soften the credit conditions for Greece. No more money: Greece left alone to weather the storm.

Read more at:

Nov 26, 2012 8:34pm EST  --  Report as abuse
usagadfly wrote:
Like many countries, Greece owes huge debts for money supposedly borrowed by the Greek people. Well, maybe. What if these countries, their ordinary people simply repudiate the debt owed and kick the people who borrowed it all, and who have prospered from the money, out of the country, revoking their rights to retain property or economic interests in businesses? The top 5%?

Then the people would have to live within their means. They would have to to some extent take care of their weak and elderly whose money was taken under false pretenses by the “government”, or the people who controlled it. They would no longer be able to borrow money. Would that be so bad? For the banks it would be bad, for the lenders who simply never said “no” because they expected some powerful thug to take what they wanted from the weak. What kind of government is that? But such a thing would stop the borrowing and stop the profiteering without enslaving entire countries.

Nov 26, 2012 9:30pm EST  --  Report as abuse
dareconomics wrote:
Click here for chart:

The chart above from ZeroHedge helps to show what is really driving the Greek bailout deal. If you thought it was the welfare of the Greek people , then you have not been paying enough attention to the Eurocrisis.

In the chart above, GDP continues its descent until after German elections in the fall of 2013. Then, the number begins rising dramatically. This is no coincidence. The purpose of the this deal is to avoid problems for a few more months to enable Merkel’s reelection. The GDP numbers are realistically poor until the fall, because Germany needs them to be. Actual money is needed to plug funding holes until the election.

After the election, it makes no difference what happens, so unrealistic projections may be used instead of real money to plug financing holes. The next time Greece needs to be bailed out, Merkel will try to get a longer term deal to keep Greece in the euro. If the political calculus does not favor another bailout for Greece, she will allow it to default. It’s that simple.

While the deal expertly defers the Greek problem for another few months, it will do nothing to arrest the descent of the economy. The Greek people receive nothing for their suffering except malaria and more suicides. The Greek politicians receive money to hand out to their cronies at the banks.

The IMF did well. It conceded to allow the Eurozone to raise the sustainability goal to 124% Debt to GDP in exchange for an agreement to reduce Greece’s debt to under 110% by 2022. The only way to reduce the debt ratio that low by 2022 is for the Eurozone to forgive Greek loans. I am skeptical that this will happen, but we will have to wait until 2016 to see if I am correct. In politics, that is a lifetime, and Schaeuble’s language is vague enough so that he can claim that nothing was promised.

The German led Eurozone did very well in this deal. In exchange for maintaining the status quo for a few more months, they gave up peanuts:

Lower interest rate on bilateral loans
Relinquishing profits an ECB held debt
Extending the maturity of the loans
Deferring interest payments for 10 years
Loaning the money to Greece to buy back its outstanding debt

The first two points actually help Greece, but the last three are mere window dressing. Extending the maturity of the loans and deferring interest payments for 10 years ensures that the Greeks will be debt slaves long after Samaras, Merkel and Juncker have retired to their summer homes.

The Greek buy back is actually bad for Greece, because it will not be able to obtain replacement financing on such generous terms:

At least it makes the numbers look good today.

While the whole deal is a scam whereby Petros is being robbed to pay Pavlos, the biggest lie comes to us courtesy of the biggest liar in the Eurozone. Ladies and gentlemen, Mr. Jean-Paul Juncker:

“This is not just about the money. This is the promise of a better future for the Greek people and for the euro area as a whole, a break from the era of missed targets and loose implementation towards a new paradigm of steadfast reform momentum, declining debt ratios and a return to growth,” he told a 2 a.m. new conference.

He’s right about one thing. It isn’t just about the money. It’s about German elections. See you at the next Greek bailout summit, J.P.

Nov 26, 2012 10:45pm EST  --  Report as abuse
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