Wheeling and dealing offers something for everyone

THERE was something for everyone, with a little more for the banks and less for the taxpayer, in the deal that emerged from the 10 hours of negotiations by eurozone leaders at the euro summit on Thursday.

Much of that time in the unglamorous surroundings of the Justus Lipsius building in the centre of the EU district was spent explaining the intricacies of the deal to the 17 prime ministers and president.

Similarly, analysts and journalists spent most of yesterday trying to decipher just what was agreed on how private investors would take a hit and so contribute to lowering Greece’s debt.

In the end, people were referred to the statement released by the Institute of International Finance — the body representing the global financial institutions, whose mission is “to support the industry in prudently managing risks including sovereign”.

Over weeks of meetings with EU officials, they devised the complex set of options from which their members who hold Greek debt can voluntarily choose as a way of cutting what Greece owes.

They will lose about 20% of their investment — much less than if Greece defaulted — by swapping for new bonds or rolling over the length of time their loans can be insured against losses by the EU’s rescue fund. In some ways, Greece has become the eurozone’s Anglo Irish Bank, one economist remarked.

The amount of Greece’s debt — now at 160% of GDP — that will be cut varies, but most agree it would be by little more than 12%. It is also increasing by this amount each year. The only way of really cutting it is to either default, find someone to “forgive the debt” or make sure the country’s annual growth is more than the interest rate they are paying on both their EU/IMF and private-sector loans.

Sony Kapoor, economist and head of the think tank Re-Define, said this will not happen without a miracle. “Now that private bondholders know that they will get a good deal and are almost surely protected against future losses by taxpayer guarantees, the price of Greek bonds is likely to shoot up, so any debt reduction through opportunistic secondary market purchases are likely to be negligible; less than €10bn by our estimates.

“So the whole fuss around private-sector involvement would result in a €20bn-€25bn reduction in the Greek debt stock, or around 7% of the out-standing debt stock, and will come at the cost of increased risks for taxpayers. It is fair to ask what the point of all of this was.

“In summary, the whole mechanism of private-sector involvement does little to increase the sustainability of Greek debt and, in fact, imposes significant additional risks on EU taxpayers.”

A cut in the interest rate and longer loan repayment periods were the easy bits. It meant that the more wealthy triple-A rated countries could no longer collect for the privilege of lending to profligate countries like Ireland.

But the Netherlands — one of the triple-As — was still not happy and insisted that the new rate could not be “at cost”, but “close to”, leaving the way open to insert a penalising margin if necessary.

The Finns, another triple-A member, insisted that countries getting a second bailout should offer state property as collateral. They did this 20 years ago when their economy hit rock bottom and it helped, they said. So “a collateral arrangement” was added to the document with the addition of “where appropriate” to facilitate doubters.

This is meant to apply only to Greece, but again, the reference was coded in deference to Greek feelings when their embattled prime minister, George Papandreou, asked his colleagues if they wanted some of his islands again.

The Finns are likely to push for collateralisation to apply to the permanent loan fund, the European Stability Mechanism, when it comes into force in 2013.

France has long advocated a type of European Monetary Fund, and the changes agreed to the European Financial Stability Fund by the summit give President Nicolas Sarkozy his wish to a very great extent.

The other major change will be to allow the fund to give debt-hit countries money to buy back their loans on the open market — which would mean cutting their debt, since the loans would be selling at less than the original value.

Exactly how this will be done and not be declared a default by the credit-rating agencies is still not clear.

Countries can buy back their debt currently without suffering negative consequences, but it has to be voluntary and not organised. This, too, is seen as being potentially very useful as a way for Ireland to reduce its debts.

In the end, the cut in the interest rate and the lengthening of the loans came quite suddenly and without much advance notice for Ireland. France had kept up pressure to have the country change its corporation tax rates and, earlier in the week, tried again, looking for some movement on an electronics industry tax — raising the issue of how to tax the digital world.

Ireland will, of course, have to engage in discussion on a single EU-wide method of calculating company tax. Discussions kick-off at the finance ministers meeting in Nov-ember. But the proposal is now out of favour with almost everyone except for France and Spain.

Discussion on tax policy generally may prove more problematic in the longer run — certainly Hungary and the Czech Republic think so, having refused to sign up to what is known as the Euro-plus Pact that commits to bringing tax policies closer together.