Tuesday, February 21, 2012

Eurozone Ministers Agree To Second Greek Bailout

The final deal has been hammered out, and the euro zone ministers have finally agreed to the conditions for a second Greek bailout. In exchange for a new loan of over 130 billion euros, the Greeks are going to have over 107 billion euros worth of debt written off.

Greece will also have to agree to the following tough conditions, with the goal of getting Greece to reduce its debt to a mere 120.5% of GDP by 2020:

  • Private holders of Greek debt are going to take a 70% 'haircut' on the value of their bonds, equivalent to 70 cents on the dollar.

  • Greece's economy will be subjected to permanent monitoring by euro zone monitors from the EU, the IMF and the ECB on the ground in Athens. In other words, Greece is essentially not in control of its own economy any longer.

  • The Greek constitution will be amended to give priority to debt repayments over the funding of government services

  • Greece will set up a special account, managed separately from its main budget, that must always contain enough money to service its debts for the coming three months

  • Essentially, the euro zone has 'purchased' Greece in exchange for lending them the money they need to pay their debts.

    The deal reflects the schizoid nature of the euro zone on the matter. On one hand,they'd like to be rid of Greece, so they came up with conditions almost impossible to meet. On the other hand,they're afraid that if Greece defaults and skips put of the euro zone, it will give other countries like Spain, Portugal, Italy and Ireland similar ideas.

    The Greek parliament is expected to vote on the bailout tomorrow.Personally, I think they'd be far better off simply defaulting,going back to the drachma and starting over fresh. No one is going to lend Greece any money or buy its bonds for some time anyway, so it's not like the country's credit ratings matter.And a number of Greeks see it that way.

    "The funds that are coming in are not staying in Greece, are not being invested in Greece, are not here to help the Greeks get out of this crisis," Constantine Michalos, president of the Athens Chamber of Commerce and Industry, told the BBC.

    "It's simply to repay the banks, so that they can retain their balance sheets on the profit side."

    Yes...and also to provide the EU time for the euro zone to build greater firewall protection around its banks and reduce their exposure when Greece eventually defaults, as well as around other potentially vulnerable countries like Spain and Italy.

    In a reversal of that old saying, it's the Greeks that need to beware of foreigners bearing gifts.


    Anonymous said...

    It's the E.U that will NOT allow Greece to default,the Greeks certainly want to default rather than face up to the disaster they have made of their country! It's only a matter a time before they do default and this bailout is just one more foolish attempt to keep the E.U together.I bet these latest austerity measures will do nothing but cause more rioting and hasten the end!

    Anonymous said...

    Greece only got into the EU by lying their way in.Good riddance.