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Last updated: November 27, 2012 1:51 pm
After two false starts in as many weeks, international lenders on Tuesday finally reached a deal to overhaul Greece’s faltering bailout programme, sending European equity markets higher in morning trading.
The agreement will release a long-delayed €34.4bn aid payment by agreeing to a series of measures that could relieve Greece of billions of euros in debt by the end of the decade.
The measures, which include reducing interest rates on Athens’ bailout loans to levels so low that some countries will probably take losses, are intended to cut Greek debt to 124 per cent of economic output by 2020, or 20 percentage points lower than Athens’ current debt path, officials said.
Markets reacted positively, with the euro initially hitting a three-week high against the dollar, while the Eurofirst 300 index gained 0.5 per cent to 1,110.16.
But several elements remain unfinished, including a Greek debt buyback programme, the success of which remains so uncertain that Christine Lagarde, the International Monetary Fund chief, said her institution would not release its portion of the Greek bailout until the transaction was successfully completed.
Ms Lagarde played down the delay, saying the IMF and eurozone governments had disbursed their tranches at different points in the past. But the decision highlighted tensions between Brussels and Washington that forced Monday’s late night meeting – the third Brussels gathering in two weeks to discuss the Greek programme.
Frank-Walter Steinmeier, leader of Germany’s opposition Social Democratic party in the Bundestag, gave a tentative green light to the Greek package on Tuesday, while warning that a future write-off of debt still looked inevitable.
With opposition support, the package would be certain to gain approval in the German parliament later this week, even if there are rebels who refuse to support it on the government side of the chamber.
“I will not recommend any position to my party group that would lead to Greece being insolvent in the short term, or even be forced to leave the eurozone,” Mr Steinmeier, former vice-chancellor and foreign minister, said in an interview with ZDF television.
At the same time he accused Wolfgang Schäuble, finance minister, of pretending that official creditors could avoid a further round of debt forgiveness, after the “haircut” already imposed on private sector creditors.
“The debt write-off has not been avoided, it has merely been postponed to a point in time after the federal elections,” he said, referring to the poll that is due to be held in September, 2013.
“We are realistic and try to tell the population honestly and sincerely how things stand. Schäuble and the present government are trying to wangle their way past the truth once again,” he said.
Mr Schäuble said at a press conference on his return to Berlin it was agreed in Brussels to look at further debt relief for Greece once the Greek government had achieved a primary surplus on its budget, scheduled for 2016.
He said the eurozone finance ministers had unanimously rejected a debt write-off two weeks ago, on the grounds that it would raise many legal obstacles to providing any further loans to Athens.
“It was clear to everyone that this was no solution to the problem,” Mr Schäuble said, denying that he had been largely isolated in opposing such a “haircut” for official creditors.
The Bavaria-based Christian Social Union, the most conservative party in Ms Merkel’s coalition government, will support the package in the Bundestag, although some of its members are certain to vote against it, or abstain. Some rebels are also likely from the liberal Free Democrats, and from Ms Merkel’s Christian Democratic Union, but not enough to block the package, especially if it has opposition backing.
Gerda Hasselfeldt, CSU leader in the Bundestag, said the deal was “appropriate to solve the problems that are currently apparent in Greece.” But she warned that a haircut on official loans would still not be legally possible for Germany in the future.
Quentin Peel in Berlin
“It’s been hard work,” said Ms Lagarde of the negotiations.
The IMF had been holding out for a deal to get Greece’s debt levels to 120 per cent of gross domestic product by 2020, a target that would have probably forced eurozone governments to make substantial writedowns on their bailout loans – something deemed politically explosive in creditor countries such as Germany and the Netherlands.
In exchange for allowing a loosening in the target to 124 per cent, Ms Lagarde secured a commitment to get debt levels to “substantially below” 110 per cent in 2022, a promise that could force eurozone governments to provide even more debt relief in the future.
Jean-Claude Juncker, who chaired the meeting as head of the group of eurozone finance ministers said it had “been a very difficult deal”.
The centrepiece of the agreement is the change in interest rates on Greek bailout loans. Bilateral loans provided to Athens under its first bailout would be cut 100 basis points, to just 50 points above interbank rates, knocking about €2bn off Greek debt levels, or 2 per cent of GDP by 2020.
Some eurozone countries, including Spain and Italy, borrow money at well above interbank rates, meaning they will probably be lending to Greece at a loss.
In addition, both the bilateral loans and assistance provided under a second Greek bailout, which is financed by the eurozone’s €440bn bailout fund, will have their maturities delayed another 15 years. Interest payments on the second bailout will also be deferred by 10 years.
The second main element was an agreement by eurozone governments to surrender about €7bn owed to them by the European Central Bank for profits on Greek bonds the bank holds. That money will instead be passed back to Greece, and officials said that would knock another 4.6 per cent of GDP from Greek debt levels by 2020.
That leaves a substantial amount of the debt relief to the debt buyback programme. Eurozone officials refused to disclose details of the programme, saying they feared it would lead to a run-up in Greek bond prices, thus undermining its success.
Those fears showed signs of being realised on Tuesday with the yield on the 30-year Greek bonds, which move in the opposite direction to the underlying price, falling 20.8 basis points to 13.13 per cent. The yield on the 10-year bond fell 6.8 per cent to 16.1 per cent.
The key to a debt buyback is to purchase outstanding bonds at heavily distressed prices, allowing Greece to retire the debt far more cheaply than if it had to pay the bonds off when they reached maturity.
But in a statement, finance ministers said the buyback price for bonds could be no higher than prices at Friday’s market close – meaning there will be little if any premium offered to private debtholders, raising questions about how many will participate.
The average price the 10-year and 30-year bonds on Friday was 28.1 cents, implying a 71.9 per cent haircut if bondholders participate at that level.
Even with the uncertainty, eurozone officials said they would release their €34.4bn once national parliaments approved the changes to the bailout. Mr Juncker said he aimed to finalise the payment by December 13.
Another €9.3bn in delayed aid, which was also approved on Monday night, will be disbursed in three separate “sub-tranches” in the first quarter of 2013 as long as Greece meets reform targets included in the programme.
Eurozone officials said they believed the overhauled bailout would be less subject to volatility in the future, as it includes automatic budget cuts in Greece’s fiscal accounts if Athens veers off track again.
Since the first bailout was agreed in May 2010, eurozone officials have been forced to agree a second bailout and conduct a major overhaul of that second plan twice.
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