After two failed attempts, the EU and the IMF finally agreed on a debt restructuring plan for Greece, thereby unlocking the tranches due under the bilateral agreement with EU countries, the IMF and the EFSF.
At the heart of the disagreement was the IMF’s requirement that Greece’s official creditors (IMF, EU countries and EFSF) accepted that the debt they hold be restructured, something that the largest creditors such as Germany and the Netherlands were keen to avoid. However, in absence of any restructuring, debt was estimated to rise to close to 190% of national income by 2014. The plan approved overnight should lower debt to 124% of GDP by 2020 by restructuring the debt held under the 1st Greek bailout (bilateral agreement with EU countries), under the 2nd bailout (by the EFSF) and by the ECB. Its main elements are:
- Rates on debt will be cut by 100 basis points (1%) to 50bps above the interbank rates. This should cut debt by about €2bn. This means that many countries lending money to Greece under the bilateral agreement will be doing so at significant losses, as they pay substantially higher interest rates to raise money in the financial markets.
- Maturities of the debt held under the bilateral agreement and by the EFSF will be extended by 15 years.
- Interest payments due to the EFSF will be extended 10 years.
- Profit on debt held by the ECB, worth about (€7bn) will be given back to Greece instead of being distributed among all Eurozone countries.
- Buy-back of debt held by private investors, allowing Greece to buy debt at a lower price than it would should it be allowed to reach maturity. The details of the programme are not known yet, but the key to attract investors to the programme is to offer prices above the market. The EU has already announced that prices can be no higher than prices last Friday, which may not be very attractive to investors.
The elements of restructuring that affect the 2nd bailout (interest rates cuts and maturities’ extensions) could also be offered to Portugal and Ireland. In the case of Portugal, the relief should apply to about the 40.4bn held by the EU, according to the fifth review of the Portuguese adjustment programme.