Eurozone leaders agreed on late Thursday that Greece should receive a new 109-billion-euro bailout, decided banks should add another 37 billion euros and took steps to prevent the euro debt crisis from spreading to Italy and Spain.
“This is the right signal at an important time,” German Chancellor Angela Merkel said.
The new aid will come on top of the 110-billion-euro bailout that Greece secured last year from eurozone partners and the International Monetary Fund (IMF).
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“The problems the euro area is facing could only be saved at the highest level. We had to act quickly — convening this meeting focused the minds and accelerated finding a solution,” European Union President Herman Van Rompuy told reporters.
New loans to Greece will have a maturity of 15 to 30 years — up from 7.5 years in last year’s bailout — while the interest rate will fall from 5.5-6 per cent to about 3.5 per cent. The concessions are to be extended to fellow bailout recipients Ireland and Portugal.
The rate decrease alone should save Greece 30 billion euros over the next 10 years, French President Nicolas Sarkozy said.
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As far as its outstanding loans are concerned, Greece will have a “substantially” longer time to pay those back, but euro leaders gave no further details.
Greek Prime Minister George Papandreou hailed the decisions and welcomed confirmation of a commitment to ease his country’s access to EU regional funds — presenting it as a kind of European “Marshall Plan.” The summit declaration did not specify how private lenders are going to contribute, indicating they would chip in “on a voluntary basis through a menu of options,” thought to include bond rollovers and bond buybacks.
A “debt buy-back programme” should reduce Greece’s debt burden by 12.6 billion euros, the leaders said.
Acquisitions are expected to be financed by the eurozone’s rescue fund, the European Financial Stability Facility, provided all eurozone members and the European Central Bank (ECB) agree to it.
The ECB was concerned that letting investors take a loss on Greek loans would push credit rating agencies to declare a selective default. In that case, the ECB said it would stop giving credit to Greek private banks, which would trigger a banking crisis.
The “selective default” is now expected to take place, but to keep bank credit from drying up, leaders pledged to guarantee “continued access to euro-system liquidity operations by Greek banks” and to “provide adequate resources to recapitalize Greek banks if needed.” To reassure investors, the leaders stressed that Greece was an “exceptional” case, offered assurances that creditors would never be asked to take losses on other euro area bonds and spelled out the “inflexible determination” of all other euro countries “to honour fully” their debts.
Leaders in the eurozone were under pressure to restore confidence in the currency and allay market fears that the debt crisis could spread to Italy and Spain, whose sovereign debt has been seen as increasingly risky by investors over the last two weeks.
The new chief of the IMF, former French finance minister Christine Lagarde, said the “collective determination” displayed at the meeting was “a bit of a first.” In the hope of preventing contagion, the summit declaration heaped praise on both Italy’s recently approved budget law and Spain’s “ambitious reforms ... in the fiscal, financial and structural area.” To help eurozone countries on the brink of crisis, such as Italy or Spain, the European Financial Stability Facility’s mandate was extended with a provision to let it buy government bonds and pay for bank recapitalizations even in countries that have not been officially bailed out.
Several high-profile bankers from Germany, France and Greece were present and were sounded out before the euro deal was announced. The package was first hammered out at a meeting late Wednesday in Berlin between Merkel, Sarkozy and ECB President Jean-Claude Trichet.
Joint Franco-German action is set to continue, as Sarkozy said he and Merkel planned to present proposals on improving eurozone governance “before the end of the summer,” which would feed into a report Van Rompuy was tasked to present by October.
The IMF has so far contributed about one third of eurozone bailouts. Mr. Lagarde said it would “continue to play its part” in providing aid, as long as Greece and the EU continued to make good on their commitments.
Before the summit, the Brussels-based Bruegel think tank called on leaders to reduce the value of Greece’s outstanding debt by “at least one third.” Drafts circulating among EU diplomats suggested the reduction achieved was around 20 per cent.
Leaders avoided discussing a more radical solution: issuing joint eurobonds to eliminate risk differentials between Germany — the currency bloc’s strongest economy — and cash-strapped members like Greece, granting them cheaper access to debt financing.