Euro zone finance ministers sealed a €130-billion-euro ($172 billion) bailout for Greece on Tuesday to avert a chaotic default in March after persuading private bondholders to take greater losses and Athens to commit to deep cuts.
After 13 hours of talks, ministers finalised measures to cut Greece’s debt to 120.5 per cent of gross domestic product by 2020, a fraction above the target, to secure its second rescue in less than two years and meet a bond repayment next month.
By agreeing that the European Central Bank would distribute its profits from bond buying and private bondholders would take more losses, the ministers reduced the debt to a point that should secure funding from the International Monetary Fund and help shore up the 17-country currency bloc.
But the austerity measures wrought from Greece are widely unpopular among the population and may hold difficulties for a country which is due to hold an election in April. Further protests could test politicians' commitment to cuts to wages, pensions and jobs.
“We have reached a far reaching agreement on Greece's new programme and private sector involvement that would lead to a significant debt reduction for Greece ... to secure Greece’s future in the euro area,” Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, told a news conference.
The euro jumped almost half a cent, reversing earlier losses, after the bailout was agreed.
But some economists say there are still questions over whether Greece can pay off even a reduced debt burden.
A return to economic growth could take as much as a decade, a prospect that brought thousands of Greeks onto the streets to protest against austerity measures on Sunday. The cuts will deepen its five-year recession, hurting government revenues.
A report prepared by experts from the European Union, European Central Bank and International Monetary Fund said Greece would need extra relief to cut its debts near to the official debt target given the worsening state of its economy.
If Athens did not follow through on economic reforms and savings to make its economy more competitive, its debt could hit 160 percent by 2020, said the report, obtained by Reuters.
“Given the risks, the Greek programme may thus remain accident-prone, with questions about sustainability hanging over it,” the nine-page confidential report said.
The accord will enable Athens to launch a bond swap with private investors to help put it on a more stable financial footing and keep it inside the euro zone.
Around €100 billion of debt will be written off as banks and insurers swap bonds they hold for longer-dated securities that pay a lower coupon.
Private sector holders of Greek debt will take losses of 53.5 per cent on the nominal value of their bonds. They had agreed to a 50 per cent nominal writedown, which equated to around a 70 per cent loss on the net present value of the debt.
Juncker said he expected a high participation rate in the deal, but some bondholders may balk at the new terms.
Euro zone central banks will also play their part in reducing the debt.
A Eurogroup statement said the ECB would pass up profits it made from buying Greek bonds over the past two years to national central banks for their governments to pass on to Athens “to further improve the sustainability of Greece's public debt”.
The ECB has spent about €38 billion on Greek government debt that is now worth about €50 billion.
The private creditor bond exchange is expected to launch on March 8 and complete three days later, Athens said on Saturday. That means a €14.5bn bond repayment due on March 20 would be restructured, allowing Greece to avoid default.
“It’s a result that can be justified and that creates the preconditions to get Greece onto a sustainable return to economic health if the swap deal with private creditors is successful,” German Finance Minister Wolfgang Schaeuble told reporters.
The vast majority of the funds in the €130bn programme will be used to finance the bond swap and ensure Greece’s banking system remains stable; some €30bn will go to “sweeteners”to get the private sector to sign up to the swap, €23bn will go to recapitalise Greek banks.
A further €35bn or so will allow Greece to finance the buying back of the bonds. Next to nothing will go directly to help the Greek economy.