Euro zone finance ministers reached a long-delayed 130 billion euros second bail-out for Greece after strong-arming private holders of Greek bonds to take even deeper losses than they had agreed last month.
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According to European diplomats, the German and Dutch finance ministers pushed for further “haircuts” after a confidential debt analysis showed that the previously-negotiated deal would cost 136 billion euros and would only lower Greek debt to 129 percent, rather than 120 percent, of economic output by 2020.
The diplomats said Jan Kees de Jager, the Dutch finance minister, and Wolfgang Schäuble, his German counterpart, sent Greek leaders back to bondholder representatives for further cuts at least four times over the course of nearly 14 hours of negotiations.
Although Greek bondholders agreed in October to accept a 50 percent cut in the face value of their bonds in face-to-face negotiations with Nicolas Sarkozy, France’s president, and German chancellor Angela Merkel, they will now be offer a “voluntary” deal with a haircut of 53.5 percent.
That will get Greek debt levels to 120.5 percent by 2020, close to the IMF’s goal for long-term debt sustainability.
European Central Bank president Mario Draghi called the deal “a very good agreement.”
The euro rose 0.8 per cent to 1.3257 on the news, before falling back to 1.3263 at 4.20 GMT.
The deal was struck hours after a “strictly confidential” report on Greece’s debt projections exposed concerns over Athens’ ability to execute its rescue program and suggested the Greek government may need another bail-out even after the 130 billion euros deal announced on Tuesday runs out.
The 10-page debt sustainability analysis, distributed to euro zone officials last week but obtained by the Financial Times on Monday night, found that even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of a new three-year, 170 billion euros bail-out.
It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its 200 billion euros debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.
“Prolonged financial support on appropriate terms by the official sector may be necessary,” the report said.
The report made clear why the fight over the new Greek bail-out has been so intense. A German-led group of creditor countries – including the Netherlands and Finland – has expressed extreme reluctance to go through with the deal since they received the report.
A “tailored downside scenario” in the report suggests Greek debt could fall far more slowly than hoped, to only 160 percent of economic output by 2020 – well below the target of 120 percent set by the International Monetary Fund. Under such a scenario, Greece would need about 245 billion euros in bail-out aid, far more than the 170 billion euros under the “baseline” projections euro zone ministers were using in the all-night negotiations in Brussels.
“The Greek authorities may not be able to deliver structural reforms and policy adjustments at the pace envisioned in the baseline,” the pessimistic scenario warned. “Greater wage flexibility may in practice be resisted by economic agents; product and service market liberalisation may continue to be plagued by strong opposition from vested interests; and business environment reforms may also remain bogged down in bureaucratic delays.”
Even under a more favorable scenario, Greece could need an additional 50 billion euros by the end of the decade on top of the 130 billion euros in new funds until 2014 agreed on Tuesday. That “baseline” scenario includes projections that the Greek economy stops shrinking next year and returns to 2.3 percent growth in 2014.
Details of what has gone off course in the report are long and daunting. A recapitalization of Greek banks, originally projected to cost 30 billion euros, will now cost 50 billion euros. A Greek privatisation plan, originally to raise 50 billion euros, will now be delayed by five years and bring in only 30 billion euros by 2020.
The report also paints a troubling outlook for the debt restructuring, expected to begin this week. The deal involves a debt swap, where private investors trade in existing Greek bonds for a package that includes 30 billion euros in bonds issued by the euro zone’s rescue fund and 70 billion euros in new, long-term Greek bonds.
The analysis says the swap, co-financed by Greece and the rescue fund, essentially creates a class of privileged investors who will chase off new bond investors when Greece attempts to return to the bond market.
“It is now uncertain whether market access can be restored in the immediate post-program years,” the report warned.