Not a long time ago, eurozone policy makers were firmly against any losses by the official sector on the purchases of bonds made to help the struggling country out of its debt hole.
But the deal reached on Tuesday by the Eurogroup contains measures that involve interest rate cuts, maturities extensions and giving profits from the purchases of Greek bonds back to the country, which most analysts find encouraging.
“I think it’s a baby step towards an official restructuring,” Martin van Vliet, eurozone analyst at ING, told Emerging Markets. “It’s got compromise between the IMF and the Eurogroup written all over it.”
Finding a sustainable solution to the Greek debt problem is seen as a crucial condition to return to growth, with the OECD saying the global recovery will be uneven, as the eurozone crisis has hit emerging marketsas well as developed ones.
Under the deal, the interest rate charged to Greece on the loans provided in the Greek Loan Facility will be cut by one percentage point, the guarantee fee costs that Greece has to pay on its EFSF loans will be cut by 10 basis points, the maturities of the bilateral and EFSF loans will be extended by 15 years (practically doubled) and interest payments on EFSF loans will be postponed by 10 years.
Eurozone member states are committed to pass on to Greece, for the purpose of servicing its debt, amounts equivalent to the income on the portfolio of Greek bonds bought by their national central banks under the Securities Market Programme, the Eurogroup said in a statement after its meeting that went into the early hours of the morning.
Greece’s measures to reduce its debt may involve buying back part of its bonds. “If this is the route chosen, any tender or exchange prices are expected to be no higher than those at the close on Friday, 23 November 2012,” the statement added.
Michala Marcussen, an analyst with Societe Generale, said the plan, while it did not include any outright debt forgiveness, left the door open for “further adjustments down the road.”
GROWTH IS CRUCIAL
The Eurogroup statement said eurozone countries “will consider further measures and assistance,” such as lower co-financing for Greece of the EU structural funds, and further interest rate cuts, if necessary, once Greece reaches an annual primary budget surplus.
“The euro countries have started to accept the idea that they won’t be paid in full,” van Vliet said. “On the bright side, it’s a clear signal that they want to keep Greece in the euro.”
“If you were to anticipate a Greek exit from the eurozone, you have to admit the odds of that happening have decreased,” he said.
But, he added, the measure still doesn’t go far enough, and a bigger haircut would have been better for Greece. This deal “rests crucially on the performance of the Greek economy,” Jonathan Loynes, chief European economist at Capital Economics, said.
“Eurozone policy makers have found a bit more money down the back of the sofa to buy another sticking plaster for Greece,” Loynes said. “But the relatively easy options are running out fast.”
Marcussen noted that “reports of social unrest from Greece have become all too frequent” and this was still something that could scupper the deal.
ING’s van Vliet said the positive side was that there was “much more sense of reality” but that a lot of time was wasted by imposing “draconian” austerity on Greece rather than structural reforms to boost its economy.
“We can only start to sleep well if the Greek economy starts growing again,” he said. “I’m most concerned about the potential for social unrest. If there’s no light at the end of the tunnel, crazy things can happen.”
The deal must be ratified by the eurozone countries’ parliaments, something the Eurogroup hopes will happen by mid-December.
IMF Managing Director Christine Lagarde welcomed the deal but said the IMF board will approve it only once more clarity over how it will be implemented emerged.
“Once progress has been made on specifying and delivering on the commitments made today, in particular implementation of the debt buybacks, I would be in a position to recommend to the IMF Executive Board the completion of the first review of Greece’s program,” Lagarde said in a statement.