| BRUSSELS, July 22
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
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)