In Athens on Wednesday, officials pressed ahead with changes to local labor laws and other measures that they must enact before they receive the money. Finance Minister Evangelos Venizelos said that the deal would put to rest fears that his country will pull out, or be kicked out, of the euro currency zone.
“The agreement . . . binds Greece to the euro,” Venizelos said on Greek television. “This is a decisive and irreversible action.”
But any hope that the deal would be an immediate salve for the struggling euro zone quickly evaporated. European markets were down Wednesday as economic data confirmed that the regional economy is slowing, and the Fitch Ratings service downgraded Greece, saying the private debt deal would amount to a Greek default even though it is designed to be “voluntary.”
The IMF analysis, meanwhile, suggested Greece’s neighbors may have to carry the country for much longer than expected as the implications of the private debt plan become clearer.
Private debt relief is a central part of the rescue program. Under a deal negotiated over several months, private investors will be asked to trade their Greek bonds for new ones that are worth about half as much but which are backed in part by a European rescue fund meant to make them less risky.
The debt exchange — which the IMF calls the largest such deal in history — is to be carried out in the next few weeks as European officials, the IMF and authorities in Athens put the final touches on the complex rescue plan hammered out in weekend talks. By the time that exchange is complete, nearly all of Greece’s outstanding loans will be in the hands of public institutions, such as the IMF, the European Central Bank or European governments.
Theoretically, during the three years of the rescue plan, Greece will restructure its economy, become more competitive and resuscitate economic growth — and be ready to wean itself from IMF and European help by again selling bonds to private buyers.
But with so much owed to governments and other public entities — all of which will take priority when it comes to repayment — private investors may well avoid investing in the country.
“Given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market in the years following the end of the new program are uncertain and require more analysis,” the IMF wrote in a bleak assessment of the new Greek program. “Prolonged financial support . . . may be necessary.”
Loans from the IMF or other public entities are generally treated as superior to those made by private investors. Public officials would not put taxpayers’ money at risk without that sort of protection.