Eurozone finance ministers have at last agreed a second bailout for Greece after protracted talks in Brussels ended today. Greece is to receive loans worth more than €130bn but in return it must cut its sovereign debt to 120.5% of its GDP by 2020 and controversially accept an “enhanced and permanent” presence of EU, International Monetary Fund (IMF) and European Central Bank (ECB) monitors to oversee economic management and ensure compliance. The deal also means private holders of Greek debt will take a 70% ‘haircut’ on their money.
Greece desperately needed the funds to be released by eurozone finance ministers to avoid bankruptcy on 20 March, when maturing loans worth €14.5bn must be repaid. The €3.3bn savings that the Greek government had already pushed through would only have cuts its debt to GDP ratio to 129% before today’s extra commitment was agreed. Identifying and pushing through further savings to achieve the desired 120.5% ratio by 2020 will not be easy in the future in the face of fierce public resistance to the measures on the streets of Athens and concerns about the erosion of national sovereignty. The Greek government is expected to vote on the terms of the second bailout on Wednesday 22 February.
After five straight years of recession, Greece’s debt presently amounts to more than 160% of its GDP. The euro immediately rose on reports of the deal, which was announced early this morning after 13 hours of talks in the Belgian capital.
The deal provides for the presence of EU monitors in Greece, overseeing the economic management of the country, as some northern members of the eurozone doubt Greece’s commitment to its spending pledges. This loss of sovereignty will be hard for the nation’s voters to stomach but was the price demanded for reaching an agreement, amid fears that ‘contagion’ could spread to Italy and Spain in the ‘core’ eurozone countries if nothing is done.
Within the next two months, Greece will also have to amend its constitution to give priority to debt repayments ahead of the funding of government services. In addition, the country will have to set up a special bank account, managed separately from its main budget, which will at all times have to contain enough money to service its debts for the coming three months.
For private holders of Greek debt, the agreement is particularly hard with losses of 53.5% on the value of their bonds being agreed, but once all aspects of the exchange are finalised this is expected to rise to as much as a 70% loss. Quite a haircut for the private sector to take but with the nation in such a state any return at all is perhaps the best that could be expected. The knock-on impact for banks holding such debt and corporations with investments in Greece will be considerable for corporate treasuries across Europe and beyond. Further support for vulnerable banks across the region may be required by the ECB and treasurers may justifiability be worried about a contraction in lending and a rise in prices if such support is not forthcoming.
Jean-Claude Juncker, prime minister of Luxembourg and chairman of the eurozone finance ministers group, announced the deal early this morning, saying it would lead to “a very significant debt reduction for Greece” and ensure its future within the eurozone. Alluding to the potential political problems ahead, he added that the eurozone group was “fully aware of the significant efforts already made by the Greek citizens” in cutting its debt. “Further major and joint efforts by all parts of Greek society are needed, however, to return the economy to a sustainable growth path,” he said.
The prospects for growth in Greece look very bleak for at least the next decade, however, and the deal may just have bought yet more time for the eurozone to build greater protection around its banks and ‘core’ members. The debate about whether Greece will still be in the eurozone come the end of the year will no doubt still rage on.
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