Greece gets new bailout with private sector help

By Gabriele Steinhauser

Associated Press

Published: Thursday, July 21 2011 12:00 a.m. MDT

Managing Director of the IMF Christine Lagarde speaks during a media conference after an EU summit of eurogroup members at the EU Council building in Brussels on Thursday, July 21, 2011. Eurozone leaders are moving closer to signing off on a second bailout for Greece but markets are fretting that any deal that emerges later Thursday may imply a Greek debt default after a plan to slap a tax on banks appears to have been shelved.

Geert Vanden Wijngaert, Associated Press

BRUSSELS — Eurozone leaders on Thursday agreed to a sweeping deal that will grant Greece a massive new bailout — but likely make it the first euro country to default — and radically reshape the currency union's rescue fund, allowing it to act pre-emptively when crises build up.

The deal resolves a political deadlock between Europe's top economic authorities over how to save Greece that had investors worried the debt crisis would spin out of control. Faced with the danger of big economies like Italy becoming unstable, the officials sought to outdo expectations at an emergency meeting in Brussels.

The eurozone countries and the International Monetary Fund will give Greece a second bailout worth €109 billion ($155 billion), on top of the €110 billion granted a year ago.

Banks and other private investors will contribute some €50 billion ($71 billion) to the rescue package until 2014 by either rolling over Greek bonds that they hold, swapping them for new ones with lower interest rates or selling the bonds back to Greece at a low price.

"For the first time since the beginning of this crisis, we can say that the politics and the markets are coming together," said European Commission President Jose Manuel Barroso.

Initial reaction from markets and analysts to Thursday's deal was cautiously positive. The euro, which had rallied sharply on expectation of the deal, rose further to gain 1.2 percent against the dollar.

The "summit conclusions surprise by their size and range," Marie Diron, senior economic adviser to the Ernst & Young, said in a note. "The measures imply significant private sector involvement and very large further support from the EU. All politically acceptable measures are being used."

The deal on involving private creditors is widely expected to be considered a "selective default" by the ratings agencies, making Greece the first euro country to ever be in default — if likely only for a short period of time.

Because of that, the eurozone will back up any new Greek bonds issued to the banks with guarantees. Those guarantees are necessary because Greek banks use Greek government debt as collateral for emergency support from the European Central Bank. Those bonds would no longer work as collateral if hit with a default rating, meaning Greek banks would lose the ECB support and quickly collapse.

In the case of bond rollovers or swaps, the new Greek bonds issued to the banks would have long maturities of up to 30 years and low interest rates, according to the Institute of International Finance, the group representing the private sector creditors. French President Nicolas Sarkozy estimated the rates would average 4.5 percent.

That will give Greece more time to get its struggling economy back in shape and cut some 21 percent of its future debt burden.

Leaders agreed to provide the new eurozone rescue loans to Greece at a 3.5 percent interest rate and with maturities of between 15 and 30 years. They will have an additional grace period of 10 years.

"I think this is extremely important to ensure the debt sustainability of Greece," Barroso said.

In addition to the new aid for Greece, the leaders also overhauled their bailout fund, giving it the power to intervene in countries before they are in full-blown crisis mode.

The changes to the fund are a big turnaround, especially for Germany, which had blocked any such move earlier this year. They show how worried the eurozone is that its debt crisis could spill over from small countries like Greece, Ireland and Portugal to big ones like Spain or Italy. Bailouts for those countries would likely overwhelm the eurozones financial capacity.

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