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Europe

Eurozone debt deal to allow 'selective default' for Greece

Video by Antoine MARIOTTI , Shirli SITBON

Text by News Wires

Latest update : 2011-07-21

Eurozone leaders meeting at an emergency summit have agreed to expand their bailout fund in a bid to tackle Greece's debt crisis and prevent contagion, reports say. The plan includes the possibility of a short-term default for Greece.

AP - Eurozone leaders were preparing a radical overhaul of their bailout fund and new loans for Greece on Thursday to keep panic from spreading on financial markets, according to a draft summit statement. Markets cheered the news, with stocks, bonds and the euro rallying sharply on hopes that a deal in Brussels might prove a turning point in the 18 month-long crisis.

The document, which seen by the Associated Press, says that banks and other private creditors have agreed to voluntarily contribute to a second rescue package for Greece through various options. The draft does not spell out the options, but officials have so far been discussing asking banks to swap or roll over their old bonds for new ones with longer maturities or buying back Greek bonds at the current, low market prices.

Private sector involvement will come with some form of guarantees that will keep Greek banks from being cut off emergency support by the European Central Bank.

That would resolve one of the key obstacles to private sector involvement, namely that Greek bonds would be frozen out of ECB support if bonds are rated at “selective default” - something that rating agencies warned would happen if banks are asked to share the burden.

According to the draft, the eurozone and the International Monetary Fund are ready to give new rescue loans to Greece, without providing a number. Eurozone leaders also plan to ease the loan conditions for their part of the bailout, by doubling the average loan maturity for Greece to 15 years from 7 ½ years currently and reduce the interest rate to 3.5 percent. Those softer loan conditions would also apply to the other bailout victims Ireland and Portugal.

However, the draft tried to draw a clear line between Greece and other struggling eurozone countries. “Greece is in a uniquely grave situation. This is the reason why it requires an exceptional solution,” it says.

To help make markets see that distinction, the draft statement foresees a radical overhaul of the eurozone’s bailout fund, the European Financial Stability Facility, giving it powers that would allow it to intervene pre-emptively, before a country is in full-blown crisis mode.

For instance, countries could be given a “precautionary program,” likely some form of credit line. That might allow countries under stress, like Spain, to continue raising money on the markets, giving an extra assurance to investors, and could also make it easier for Ireland and Portugal to re-enter the markets once their bailout programs expire. Money from the EFSF could also be used in certain situations to recapitalize banks in countries that have not yet been bailed out, the draft says.

On top of that, the EFSF should be authorized to buy up bonds on the secondary market under ECB analysis and as long as all eurozone countries agree, according to the draft. Such secondary market intervention could support sovereign bonds experiencing a sell-off by investors. A eurozone official warned that the draft was “definitely not final” and that “anything can change.”

 

Date created : 2011-07-21

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