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EU approves new Greek bailout

21 February 2012, 22:45 CET
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EU approves new Greek bailout

Lagarde - Venizelos - Photo EU Council

(BRUSSELS) - Eurozone finance ministers in Brussels approved early on Tuesday a second bailout of Greece after six months of extremely tense discussions which exposed sharp divisions in Europe.

The last few weeks of negotiations stalled on deep mistrust by some northern European countries of the determination in Greece to enact commitments and change the political culture.

These were some of the other major hurdles encountered:

FINANCIAL AID

The new bailout should be the biggest in history.

It includes a write-down of privately-held Greek sovereign debt, called private sector involvement (PSI) of 107 billion euros ($142 billion) and 130 billion euros in loans to enable the country to avert default on March 20, to pay its bills and to refinance its banks.

A last minute problem arose over scepticism that even the latest package would reduce Greek debt, currently about 350 billion euros, to the initial target of 120 percent of gross domestic product.

The International Monetary Fund, which has funding strains of its own, is to determine its contribution in March. Another problem has been the size of EU-eurozone bailout funds to stave off contagion to Portugal, Spain and Italy. This has grown with difficulty by stages because of reticence in some countries over the size of their contributions, but the eurozone now intends to boost the latest figure of 500 billion euros to 750 billion euros.

CONDITIONS

The Greek government, replaced in the course of last year, has had to push budget cut after budget cut through parliament, in the face of strong public protests, but has also come under increasing pressure from auditors who complained that Greece was constantly behind in enacting promised reforms to modernise its economy. The latest agreement has taken six months to negotiate, first over the private sector debt write-off and in the last few weeks over increasing demands by the eurozone for conditions and surveillance to ensure that promises are kept. Two such conditions concern greatly tightened conditions to ensure that promises are kept, and arrangements to ensure that money is kept available to pay debt interest.

WRITE-DOWN

Without a writedown, Athens faced a default over debt repayments on March 20, with about 14.4 billion euros due to bondholders.

The technical procedures, beyond the difficulty of negotiations between Greece and bondholders, are complex and take time to put in place.

ROLE OF ECB

The Role of the European Central Bank has been and remains crucial. The ECB is propping up the Greek banking system, and banks in some other countries, with cheap short-term refinancing. In addition, last year, having received new assurances on reforms from some weaker eurozone countries, it bought substantial amounts of debt in eurozone markets from financial institutions to hold down market borrowing rates for the countries concerned. This also provided some help to banks holding the bonds. At the end of last week the ECB reportedly began swapping some of its Greek debt for new bonds, signalling that it would seek to make any book profit available to Greece. This was taken as a strong signal that finance ministers were about to agree on a rescue, but some analysts question the legal basis on which the ECB did this unilaterally.

Under the agreement, national central banks in the eurozone which are also part of the ECB system, are to contribute to the rescue.

SCEPTICISM

Despite the drawn-out efforts to lock up a credible but complex package to rescue Greece for a second time, and because of the climate of mistrust and deep uncertainty throughout the last week of negotiations, some market analysts remain sceptical that even with this agreement Greece can climb out of its crisis and avoid defaulting eventually. They point to reported disagreements between German Chancellor Angela Merkel, saying she does not want to consider default, and her Finance Minister Wolfgang Schaeuble, who is said to be worried that Greece will not be able to reduce its debt-to-output ratio to feasible levels.

RATIFICATION

The next summit of European Union leaders is on March 1-2.

The newly approved bailout requires parliamentary approval in Germany and elsewhere. The planned date for that is February 27.

The Netherlands are also to put any request for new loans to its parliament.

Likewise Finland, which already secured cash collateral from Greece for keeping its loans going under the first bailout, and an effective opt-out from loans made under a new EU bailout fund, the European Stability Mechanism, that enters service in July.

The eurozone-IMF rescue for Greece:
the main points
List of Greek debt held by big 
European banks and insurers

Eurogroup statement


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