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Wednesday, February 22, 2012

The EU comes up with a new financial assistance programme for Greece

Last Monday, finance ministers of the European Union reached an agreement on a 130 billion euro bailout for Greece, until 2014. The emphasis has been put on the efforts to be provided by credit institutions in terms of transparency, in order to facilitate the monitoring of their activities. It is announced that these efforts should bring down the Greek debt to 120.5% of its GDP by 2020.

The Commission experts will also work closely with the Greek government to assist the Troika (i.e. the European Commission, the European Central Bank and the International Monetary Fund) which will assess how Greece is implementing the programme.

Greece pledged to introduce over the next two months a new provision into its national law that guarantees priority to debt -servicing payments. It also agreed to introduce this provision into its constitution later on.

In addition, Greece has decided to put in place a mechanism to better trace and monitor the funds intended for servicing its debt. Under this mechanism, an amount corresponding to the coming quarter's debt service will be paid directly to a segregated account of Greece's paying agent.

Official sector involvement

First, all member states agreed on an additional retroactive lowering of the interest rates on the bilateral loans to Greece, so that the margin amounts to 150 basis points over the entire period of the loans. This will bring Greece's debt-to-GDP ratio down by 2.8 percentage points in 2020 and reduce financing needs by EUR 1.4bn.

Moreover, there will be no additional compensation for higher funding costs for creditor member states.

Second, governments of member states whose central banks currently hold Greek government bonds in their investment portfolio undertake to pass on to Greece an amount equal to any future income accruing to their national central bank stemming from this portfolio until 2020.

These payments would be expected to help reduce the Greek debt ratio by 1.8 percentage points by 2020 and it is estimated that they will lower the financing needs over the programme period by approximately EUR 1.8bn.

Private sector involvement

The Greek authorities reached a common understanding with the private sector creditors on the general terms of the private sector involvement in the restructuring of the Greece's debt. A nominal "haircut" (a reduction in the amount of debt to be repaid to creditors) amounting to 53.5% was agreed.

In the coming days Greece will formally launch the bond exchange, whereby the bondholders will receive new bonds with the interest rates of up to 2% until 2014; 3% between 2015-2020 and 4.3% thereafter.

Further steps

Member states should now launch their national procedures to allow for the provision by the EFSF (European Financial Stability Facility) of the necessary financing.

The next Eurogroup meeting will take place at the beginning of March to assess the implementation by the Greek government of all prior actions. It will examine the next steps to be taken and launch this second programme for Greece.

The European Council meeting on 1-2 March will review the combined lending capacity of the EFSF and ESM (European Stability Mechanism).

Source  Council of the European Union

More information  Statement by the Eurogoup

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