It’s ultimately the markets that will decide
If the markets decide that the agreement is a bad deal for Greece, then contagion will set in quickly as investors attack Spain and Italy.
They could fall like dominoes before the EU gets the rest of its safety net in place heralding a long hot summer for the euro.
If it works, then it brings the eurozone an important step closer to the kind of unity seen in the US with its dollar, and which many believe is essential for the future.
The first part of the agreement deals with the conditions for giving Greece a second bailout, estimated to be equal to the first bailout of €110 billion, given just a year ago, but which has failed to lift the country out of its debt mire.
The eurozone leaders have at last admitted that the country’s €360bn debt is just too much for the country to deal with, and that penal interest rates are not helping.
They have agreed to lower the interest rate and give them 15 years to pay back from the current 7.5 years. For this, the Greeks will have to put up some of their nation’s belongings, such as government buildings, as collateral, much like putting up your house when you draw down a mortgage.
A type of European Marshall Plan was agreed for Greece using EU grants which Greece cannot afford to draw down now because they have to put up a certain amount of the money. This was the deal in which the US backed funds to help rebuild Germany and Europe after the Second World War, but the phrase was removed from the final agreement at the request of Germany.
The European Commission will cut the amount of matching funds to the minimum of about 15% and lend them this sum or arrange cheap loans from the European Investment Bank.
But the issue that has taken up most of the time and energy is the German insistence that private investors should take a hit too. This private sector involvement has drawn screams of pain from the credit rating agencies as their investors fear losing money, while hedge funds and others who have taken bets on Greece defaulting will have to pay out.
The European Central Bank also sees such a scenario as a threat to them and warn that if such action is taken they cannot, under their rules, continue to lend to Greek banks, which like Ireland’s are almost totally dependent on money from the ECB to fund day to day business.
For weeks now the EU officials have been working with the bankers’ representatives, the Institute of International Bankers, to reach an agreement with them on how they can take money from them, and how much. Their representatives were at yesterday’s meeting.
They have produced a menu of options including bond exchange, roll-over and buyback. Bond swaps will offer different options for different investors such as for banks, insurance funds etc. The aim is to collect 20% of the present value of these investments and involve 90% of the €150bn that is held in Greek bonds. These investors can swap their bonds that have a maturity of up to 2020 for new bonds that will attract a lower rate of interest.
However, experts say this will not necessarily lower the total of Greek debt, but it will fulfil Germany’s insistence that the private sector suffer a loss, and mean Greece will be off the markets and need to repay until 2020.
It will also mean what is called a selective default but not a credit event, so those who have taken massive bets on Greece defaulting will not collect. But ways will have to be found to ensure the Greek banks stay afloat for what everyone hopes will be the very short length of time the country will be in default and during which the ECB cannot ensure the ATM machines in Athens remain stocked.
The buy-back is something that could also interest Ireland at a future date although it was still unclear if such a move would be read by the markets as a default which could mean a complicated fall out that the country would not want.
The idea is that the European Financial Stability Fund (EFSF) — set up by member states to lend to countries in trouble — could buy back a country’s debt on the markets where it is now for sale at a discount — and in this way cut the amount of money the country owes.
Whether the EFSF will buy bonds itself or will lend the money to the country in trouble to do so was unclear. They could also buy it to retire it, cutting the entire amount out of the total of Greek debt.
The EFSF will also be changed so that it can provide credit enhancement — guarantees limiting potential losses to private investors if Greece was unable to repay the new bonds they swapped or rolled over.
The fund will also be changed to allow them to lend to countries that have problems raising money on the open market if, for instance, the cost of borrowing suddenly rises to dangerous levels. They will have some conditions attached but will not have to endure the kind of austerity measures of programme countries.
It will also provide money for governments to help out their financial institutions — something they have already done for Ireland but could find themselves having to do for more following the bank stress tests.
CONNECT WITH US TODAY
Be the first to know the latest news and updates
