Euro zone, IMF agree on Greece aid deal


A protester holds a Greek flag during a demo in front of the parliament in Athens on Wednesday Nov. 7, 2012. (Lefteris Pitarakis/AP)
November 26, 2012

Euro-zone finance ministers and the International Monetary Fund clinched agreement on reducing Greece’s debt on Monday in a breakthrough to release urgently needed loans to keep the near-bankrupt economy afloat.

After 12 hours of talks at their third meeting in as many weeks, Greece’s international lenders agreed on a package of measures to reduce Greek debt by 40 billion euros (nearly $52 billion), cutting it to 124 percent of gross domestic product by 2020.

In a significant new pledge, ministers committed themselves to take further steps to lower Greece’s debt to “significantly below 110 percent” in 2022 — the most explicit recognition so far that some write-off of loans may be necessary from 2016, the point when Greece is forecast to reach a primary budget surplus.

“When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt,” German Finance Minister Wolfgang Schaeuble said.

Eurogroup Chairman Jean-Claude Juncker said ministers would formally approve the release of a major aid installment needed to recapitalize Greece’s teetering banks and enable the government to pay wages, pensions and suppliers on Dec. 13.

Greece will receive up to $56.7 billion in stages as it fulfills the conditions. The December installment will comprise $31 billion for banks and $13.7 billion in budget assistance.

The IMF’s share, less than a third of the total, will only be paid out once a buy-back of Greek debt has occurred in the coming weeks, but IMF Managing Director Christine Lagarde said the fund had no intention of pulling out of the program.

To reduce Greece’s debt pile, ministers agreed to cut the interest rate on official loans, extend their maturity by 15 years to 30 years, and grant Athens a 10-year interest repayment deferral.

They promised to hand back $14 billion in profits accruing to their national central banks from European Central Bank purchases of discounted Greek government bonds in the secondary market.

They also agreed to finance Greece to buy back its own bonds from private investors at what officials said was a target cost of about 35 cents in the euro.

European Central Bank President Mario Draghi said on leaving the talks: “I very much welcome the decisions taken by the ministers of finance. They will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece.”

Juncker said the accord opened new hope for Greeks.

“This is not just about money. This is the promise of a better future for the Greek people and for the euro area as a whole, a break from the era of missed targets and loose implementation towards a new paradigm of steadfast reform momentum, declining debt ratios and a return to growth,” he told a 2 a.m. news conference.

Greek Finance Minister Yannis Stournaras said earlier that Athens had fulfilled its part of the deal by enacting tough austerity measures and economic reforms, and it was now up to the lenders to do their part.

Greece, where the euro zone’s debt crisis erupted in late 2009, is the currency area’s most heavily indebted country, despite a big “haircut” this year on privately held bonds. Its economy has shrunk by nearly 25 percent in five years.

Negotiations had stalled over how Greece’s debt, forecast to peak at 190 to 200 percent of GDP in the next two years, could be cut to a more sustainable 120 percent by 2020.

The agreed figure fell slightly short of that goal, and the IMF was still insisting that euro-zone ministers should make a firm commitment to further steps to reduce the debt stock if Athens implements its adjustment program faithfully.

The key question remains whether Greek debt can become sustainable without euro-zone governments having to write off some of the loans they have made to Athens.

— Reuters

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