21 February 2012

WSJ: Europe reaches a Greek deal

Greece ended months of uncertainty by finally securing a new bailout and debt-restructuring agreement with eurozone finance ministers, but doubts remain over whether Greece will be able to meet the ambitious terms of the accord.

The finance ministers agreed on the long-awaited €130 billion. The meeting, which lasted nearly 13 hours, produced a plan that would reduce Greece's debt to 120.5 per cent of GDP by 2020. International Monetary Fund Managing Director, Christine Lagarde, said that the target was lowered from 129 per cent at the start of the meeting.

Private sector creditors agreed to take a write-down on their bonds of 53.5 per cent—more than the 50 per cent write-down that had been conceded before the meeting. The private debt exchange is expected to cut Greece's debt by €107 billion, according to the Institute of International Finance, which negotiated on behalf of bondholders.

Profits on an estimated €12 billion of bonds held by national central banks in the eurozone will be passed on to Greece, reducing its debt by €1.8 billion before 2020. The meeting decided against the central banks participating in the private sector debt exchange.

The ministers also agreed to a further reduction in interest rates on the €53 billion in loans from the eurozone made as part of the first bailout agreed upon in May 2010, saving some €1.4 billion.

Even with the agreement, economists expect the deal will leave longer-term questions about Greece's ability to pay off even its reduced debt burden. "There are downside risks. This is clear", said the IMF's Ms Lagarde. "It's not an easy programme. It's a very ambitious programme."

The problem: The Greek economy must become more competitive through across-the-board wage cuts, allowing the country to export its way back to economic health. But that hoped-for export boom could take years to materialise. Meanwhile, falling wages will only deepen Greece's recession, making the government's debt burden—still large even after the restructuring—harder to bear.

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