Europe agrees sweeping new action on debt crisis

BRUSSELS,  (Reuters) – Euro zone leaders have agreed  on a bold rescue package for debt-stricken Greece and will give  their financial rescue fund sweeping new powers to prevent  market instability spreading through the region.

Mark Rutte

An emergency summit of leaders of the 17-nation currency  area announced yesterday a second bailout for Athens involving  an extra 109 billion euros ($157 billion) of government money,  plus a substantial contribution from private sector bondholders.

The leaders also made detailed provisions for limiting the  damage if, as seems likely, credit rating agencies declare  Greece to be in temporary default — the first such event in the  12-year history of the euro.

The package pleased financial markets because it suggested  that for the first time since the Greek debt crisis erupted  early last year, the euro zone was taking a comprehensive,  long-term approach to the problem, rather than simply lending  Greece more money to avoid disaster in the near term.

“We have thus sent a clear signal to the markets by showing  our determination to stem the crisis and turn the tide in  Greece, thereby securing the future of the savings, pensions and  jobs of our citizens all over Europe,” Dutch Prime Minister Mark  Rutte said after eight hours of talks.

French President Nicolas Sarkozy said measures agreed at the  summit, the fifth this year on the crisis, would together reduce  Greece’s debt by 24 percentage points of gross domestic product  from about 150 percent today.

Greek Prime Minister George Papandreou said the deal would  cover his country’s funding needs until 2020 and make its debt  sustainable, but analysts questioned whether the reduction would  be sufficient to avoid a restructuring in the medium term.


The new bailout of Greece, details of which are likely to be  set formally in September, will supplement a 110 billion euro  rescue plan for the country launched by the European Union and  the International Monetary Fund in May last year.

Among other steps, the leaders agreed yesterday to ease   terms on bailout loans to Greece, Ireland and Portugal;  maturities will be extended to 15 years from 7.5 and interest  cut to around 3.5 percent from 4.5-5.8 percent now.

Banks and insurers will voluntarily swap their Greek bonds  for longer maturities at lower interest rates to help Athens.   Acknowledging that the swap scheme may lead to Greece being  declared in selective default, Sarkozy said euro zone nations  stood ready to protect Greek banks from the fallout, by  providing credit guarantees if needed to ensure they can still  obtain liquidity from the European Central Bank.

The region’s rescue fund, the European Financial Stability  Facility, will be allowed to buy bonds in the secondary market  if the ECB deems that necessary to fight the crisis.

It will also be allowed for the first time to give states  precautionary credit lines before they are shut out of credit  markets, and lend governments money to recapitalise banks —  both moves which Germany blocked earlier this year.

The expanded EFSF role is designed to prevent bigger euro  zone states such as Spain and Italy from being excluded from  markets because of fears of a weaker country defaulting.

“We have agreed to create the beginnings of a European  Monetary Fund,” Sarkozy said of the EFSF’s new powers.

In addition, the leaders promised a “Marshall Plan” of  European public investment to help revive the Greek economy,  which is in a deep recession due to draconian austerity steps  imposed by the EU and the IMF. They did not give details.


Four options will be offered to private sector creditors  taking part in the plan: three offers to exchange Greek  government bonds and one offer to roll over Greek bonds into  debt with maturities of up to 30 years. In addition, there will  be a bond buyback scheme.

The Institute of International Finance, which represents  over 400 firms and led talks for the private sector, said the  bond exchange would help reduce Greece’s 340 billion euro debt  pile by 13.5 billion euros. It predicted a 90 percent take-up  rate by investors; several sources said the resulting net  contribution would mean a write-down of about 20 percent on the  value of banks’ Greek bond holdings.
The summit accord was based on a common position crafted by  German Chancellor Angela Merkel and Sarkozy in late night talks  in Berlin on Wednesday with ECB President Jean-Claude Trichet.

In an apparent trade-off for Merkel’s willingness to embrace  new powers for the EFSF, Sarkozy agreed that private sector  bondholders should take a hit and dropped a French call for a  tax on banks to help fund the second Greek bailout.

The ECB relented and signalled it was willing to let Greece  default temporarily under the plan, although Trichet told  reporters he did not want to prejudge whether that would occur.

The expansion of the EFSF’s role will have to be endorsed by  national parliaments in the euro zone, but diplomats said  critical lawmakers in Germany, the Netherlands and Finland were  likely to back it since the private sector will share the burden  of the new Greek rescue.

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