EU has engineered a further bail-out package for Greece

The Council of the European Union released a statement yesterday, outlining the latest support package for Greece (Ireland and Portugal also benefit). The IIF also released details of the private sector’s ‘debt restructuring'.

Very brief executive summary:

The EU, together with the IMF and major private sector banks, have designed a financial support package to fully cover the financing gap in Greece. The total official financing will amount to an estimated 109 billion euro.

The private sector has indicated its willingness to support Greece on a voluntary basis. The net contribution of the private sector is estimated at 37 billion euro.

The official and private sector support includes lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece. More specifically, the maturity of future EU loans to Greece will be lengthened to the maximum extent possible, from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. The interest rate will fall to around 3.5%. The EU will use the European Financial Stability Facility (EFSF) as the financing vehicle.

The details of the new bail-out package for Greece are as follows:

  • The EU has reaffirmed its commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole. The EU also reaffirmed its determination to reinforce convergence, competitiveness and governance in the euro area.
  • The Greek government is strongly encouraged to continue to stabilise its public finances and reform the economy, including privatisation. Further efforts will be made to help grow the Greek economy.
  • The EU, together with the IMF and the voluntary contribution of the private sector, undertakes to fully cover the financing gap in Greece.
  • The total official financing will amount to an estimated 109 billion euro.
  • The maturity of future EFSF loans to Greece will be lengthened to the maximum extent possible; from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. The maturities of existing Greek debt through the EFSF will also be extended substantially.
  • The EU will provide EFSF loans at lending rates equivalent to those of the Balance of Payments facility (currently approximately 3.5%), without going below the EFSF funding cost.
  • The EFSF lending rates and maturities agreed upon for Greece will be applied also for Portugal and Ireland.
  • The private sector has indicated its willingness to support Greece on a voluntary basis through a menu of options further strengthening overall sustainability. The net contribution of the private sector is estimated at 37 billion euro (IIF has provided details, if anyone requires).
  • Credit enhancement will be provided to underpin the quality of collateral so as to allow its continued use for access to Euro system liquidity operations by Greek banks. The EU has indicated that they will provide adequate resources to recapitalise Greek banks if needed.
  • A collateral arrangement will be put in place so as to cover the risk arising to euro area Member States from their guarantees to the EFSF.
  • Public deficits in all countries, except those under a programme, will be brought below 3% by 2013 at the latest. In this context the EU statement highlights the budgetary package recently presented by the Italian government which will enable it to bring the deficit below 3% in 2012 and to achieve balance budget in 2014. They have also applauded the ambitious reforms undertaken by Spain

Conclusion:

The support package amounts to an extensive and generous restructuring of Greece’s debt aimed at stabilising the sovereign debt crisis in Greece, Ireland and Portugal, while at the same time trying to ensure that the crisis does not spread more fully to Italy and Spain.

It will be interesting to see how the Credit Rating agencies respond to the debt restructuring, but at least there is no outright default. It is likely that some analysts will express concerns about the risk of a Euro-area banking crisis given the ‘voluntary’ restructuring of private sector debt. The EU has indicated that they are ready to support the banks, if required. Also, given the length of time the restructuring has taken, I would imagine that most of the more heavily impacted banks will have implemented strategies to limit the damage.

It is too early to judge the market’s reaction to the package, but Greece 2-year bond yield has fallen from over 40% to 33% in one day, while the Greece 10-year bond yield is down at 16.6% from 18.2% two days ago. Similarly, the bond yields in Portugal, Ireland, Spain and Italy all fell noticeably yesterday and will probably decline further today.

Greece has a long and very difficult road ahead, but the current support package should avert the immediate crisis.

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