Greece Wins For Now
Late Monday night, euro zone finance ministers and the International Monetary Fund (IMF) reached an agreement that gives Greece more breathing room than expected. The agreement came after weeks of tense negotiations and for the time being appears to have thwarted the possibility of an unstructured default by Greece.
Greece’s Prime Minister, Antonis Samaras, was quick to applaud the deal and promised that “a new day for Greece” will commence on Tuesday. Greece has endured stern austerity cuts and has been unable to realize full value on several asset sales. The agreement has both short and long-term consequences for the ailing economy that has suffered seven recessions in recent years.
The central stipulation of the deal is that lenders agreed to reduce Greek debt by more than 40 billion euros, which should cut the sovereign debt to 124 percent of GDP by 2020. By 2022, Greek debt could fall to 110 percent of GDP if the finance ministers take the actions they agreed to on Monday.
2016 Could Provide First Budget Surplus
The 2022 goal reflects what many analysts project as an inevitable write-off of obligations due in 2016. It is in this year that Greece is projected to achieve its first primary budget surplus in many years. The idea of a projected write-off may be a stumbling block when the deal is presented to the Finnish, German and Dutch parliaments. German Finance Minister Wolfgang Schaeuble has already asked the German Parliament to consider the deal.
The entire agreement is scheduled to be approved and signed on December 16, 2012. Several international leaders praised Greece for its austerity measures, but there are serious questions about how the ailing nation can regain its economic footing.
Zero Interest for 10 Years
Among the terms of the agreement, finance ministers agreed to trim interest rates on sovereign debt loans and extend the term of the loan from 15 to 30 years. Interest on European Financial Stability Facility loans will be waived for ten years. If Greece cannot succeed under these generous concessions, there is no out in sight for the country.
Greece is set to receive 43.7 billion euro in for installments, but must meet the stringent austerity conditions. 34.4 billion euros will be advanced to the government in December. 10.8 billion euros will be allocated to sustain the budget. Another 23.8 billion euros will be used to shore up the country’s ailing banking sector.
In a separate section of the agreement, the finance ministers agreed to return about 11 billion euros in profits accrued in their central banks which were prompted by actions taken by the European Central Bank (ECB). The IMF agreed to honor the deal after taking a different stance over the past few months. If the IMF had halted lending to Greece, the deal would not have been viable.
One portion of the deal dealt with handling hedge funds. The finance ministers agreed to deter hedge funds from manipulating interest rates by entering into a 10 billion euro program. This program will be used to purchase outstanding debt from hedge funds and private investors at $0.35 on the euro.
Samaras faces his own internal battles at home where the Greek Parliament is now controlled by a rival party, SYRIZA. This part has already renounced the deal as woefully inadequate in making Greece’s debt affordable.
Germany’s approval of the plan hinges on convincing Parliament that the country’s contributions will not be subject to a write-off. To ensure this, German funds will be earmarked into a strengthened “segregated account” that will prevent default.
The IMF came on board because it believes the extended term and favorable interest rate makes a Greek recovery possible. Some negotiators pointed out that the body would consider additional write-off if Greece continued to sustain its austerity budget. This new agreement is definitely a step in the right direction, but will come under close scrutiny from the Dutch, Finns and Germans.