October 27th, 2011
Econintersect: At 4 am Thursday (October 27) the Eurozone leaders announced a deal that officials believe will reduce Greek sovereign debt to 120% of GDP by 2020. Also part of the deal is €130 billion (about $182 billion) from the European Union and the IMF (International Monetary Fund). In addition, the EU ministers agreed to provide “risk insurance” to new bonds issued. The biggest part of the news is that private holders of Greek bonds will take a 50% haircut. (Picture shows French Presidet Nicolas Sarkozy and German Chancellor Angela Merkel leaving the meeting after the early morning agreement.)
Follow up:From Reuters:
Euro zone leaders struck a deal with private banks and insurers on Thursday for them to accept a 50 percent loss on their Greek government bonds under a plan to lower Greece's debt burden and try to contain the two-year-old euro zone crisis.
The agreement was reached after more than eight hours of hard-nosed negotiations involving bankers, heads of state, central bankers and the International Monetary Fund and aims to draw a line under spiraling debt problems that have threatened to unravel the European single currency project.
Under the deal, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece's debt burden by 100 billion euros, cutting its debts to 120 percent of GDP by 2020, from 160 percent now.
At the same time, the euro zone will offer "credit enhancements" or sweetners to the private sector totaling 30 billion euros. The aim is to complete negotiations on the package by the end of the year, so that Greece has a full, second financial aid program in place before 2012.
It was key that the private sector agree voluntarily to the debt restructuring and the 50% write-off, because if it was mandated the credit rating consequences would have been more severe.
From the Financial Times:
“Debt sustainability for Greece can only be established if the private sector participates in a substantial way,” Angela Merkel, the German chancellor, said after the deal was reached. “The world had its eyes on us today.”
The Greek deal proved the most difficult and intractable of all the elements of a three-pronged rescue plan that European leaders hope will reverse their escalating sovereign debt crisis.