Tuesday, February 21, 2012


Tough agreement for Greece/Neweurope

On the night of 20 February, the Eurogroup Council of the 17 Eurozone finance ministers concluded, after a 14-hour meeting in Brussels, the much-discussed Greek deal that the capital markets had been expecting and hoping for over the past few days.
Washington also expressed a strong interest in the Eurogroup concluding an agreement on 20 February over the Greek debt. The deal includes Private Sector Involvement (PSI) in alleviating the Greek debt held by the banks, by cutting by 53.5% instead of 50% and a package of €130 billion of soft loans to be granted to Athens by the other 16 Eurozone countries and the International Monetary Fund (IMF).
Incidentally, the IMF is now not going to contribute the one third of the loans for Greece that was agreed in May 2010.
Bitter medicine
This second package to bail out Athens also contains a bitter pill for Greeks with its demands for severe cuts in pensions and wages along with far-reaching measures to deregulate the labour and services markets liberalise product markets and undertake a number of major privatisations including almost all public utility companies and public transport (ports, airports, railways).
The increase of the 'haircut' on the nominal value of the Greek bonds held by banks in the forthcoming application of the PSI to 53.5% instead of 50% was agreed late on 20 February, in a parallel meeting involving Greek Finance Minister Evagelos Venizelos, representatives of the troika overseeing the Greek economy and the Commission on the one side and the leadership of the International Institute of Finance comprising Secretary-General Charles Dallara and IIF and Deutsche Bank President Josef Ackermann.
Increased 'haircut'




The increase of the 'haircut' was deemed necessary in order to cover an 'orphan' sum of €15 billion in the Greek debt which has to be reduced to 120% of the GNP by the year 2020 and those €15bn were raising this percentage to 129% of the GNP. This 'orphan' part of the Greek debt is the residual sum of the debt after the PSI operation, which is expected to reduce it to 120% of GNP by 2020.
This must be seen in relation to the 120%-of-GNP threshold that is considered to be the sustainability upper level for the sovereign debt for every country. So, those nine percentage points or a round sum of €15bn is supposedly the part of the 'orphan' Greek debt that is not accounted for by the overall aid package to Greece of €130bn, and needs to be covered. It is the IMF that considers a sovereign debt above this level as non-manageable and cannot participate in its financing. As a result, somebody has to cover the €15 billion. But who?
The 'orphan' debt
It could have been either the banks with a larger-than 50% haircut in the Greek bonds they hold (PSI) as it turned out to be, or an increase in the official participation (by the 16 Eurozone governments) above the agreed level of €130bn, or by the national central banks. As stated above, the first option was discussed in a parallel meeting by Athens and Brussels politicians and experts on the one side and on the other the heads of the IIF, which represents the banks, and who finally agreed that the private sector will accept a 53.5% haircut.
As for the second option, it was termed as impossible given the political problems that the 16 governments will face if they ask their own parliaments to pay more. The third option has already been initiated – the national central banks of the Eurozone that had Greek bonds in their portfolios have already exchanged them for replacements of the same face value, so that they will be excluded from the swap that’s soon to be realised under the PSI plan to alleviate the country’s debt.
PSI and central banks
It should be remembered that during the PSI exercise all holders of Greek bonds issued before a certain date will be called on to exchange them for new ones at a 53.5% reduced face value and, if they wish, they may receive 15% in cash. This is supposed to cut the Greek debt by €107bn. As for the participationof national central banks, according to information from Athens a number of such official institutions that are members of the European Central Bank (ECB) hold Greek bonds of a nominal value of €15bn in their portfolios, which they bought in the secondary debt market at discounts of around 30%.
During last week, those Greek bonds were exchangedfor new at the same nominal value. This exchange produced windfall profits for the central banks, to the tune of €4.5bn at the expense of the poor Greek taxpayers.
Given, however, that those monetary policy institutions are not there to make profits on the back of Eurozone citizens, they are expected to return this profit to their shareholders, that is the 17 Eurozone governments, who in turn are expected to transfer it to their Athens peer the Greek government. In short, the €4.5bn isto be used to begin reducing the nominal value of the Greek debt.
The agreement
In any case, the crucial Eurogroup meeting began positively with only one item on the agenda, namely the Greek deal. Luxembourg Prime Minister and Eurogroup President Jean-Claude Juncker, said that he was confident there would be a decision on the long-awaited Greek deal.
Equally favourable statements for a positive outcome came from IMF Chief Christine Lagarde and the central figure in this entire affair, German Finance Minister Wolfgang Schäuble, given that Berlin will carry the largest financial burden for the Greek deal.
Earlier in the day, Commissioner Olli Rehn had also predicted a positive outcome. Negotiations over the deal have reached their third month, after the 27 EU leaders in the European Council of 28 October 2011 gave the green light for Greece’s second bailout package.
The final touches to the deal that were pending since the morning of 20 February concerned two more security issues, to ensure that Greece will pay its debts in full.
Firstly, that the money will not be made available to Athens in one go, but the release of funds will be bonded to the decisions of the EU-ECB-IMF troika, which will be constantly and officially present in Athens, based in the Bank of Greece and monitoring and issuing directions for the course of the economy.
In reality, this second bailout package of €130bn, despite being Greek property, will be deposited in an escrow bank account and the funds to pay the Greek debts will be released only by the troika. In general, the troika expects that the country’s sovereign debts will be paid as a priority by the Greek state’s receipts.  from new europe

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