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Athens, rescue with conditions

· The EU gives the green light to the aid package but imposes continuous monitoring ·

World markets show little enthusiasm

After 13 hours of negotiation, Brussels gave the green light to the second round of aid to Greece. While they claimed to be aware of the efforts made by Athens, the ministers of Finance of the Eurozone asked for new interventions and continuous monitoring by the international authorities. This de facto compulsory administration does not scare Greek Prime Minister Lucas Papademos who said he was “very satisfied” with the outcome of the summit. Satisfaction was also expressed by the other heads of state and government. However, the world markets are left uncertain. At the end of the morning the main European stock exchange list showed slight losses.

The agreement assuring the sustainability of Greek debt is based on the assumption that Greece will consolidate accounts and return to a primary surplus in 2013, will implement privatizations and apply the reforms suggested by the troika (EU, ECB, IMF). With the contribution of the private and public sectors Greece's debt stands today at 160 percent and is expected to be reduced to 120.5 percent in 2020, which is the threshold considered to be “sustainable”. The aid, totalling 130 billion euros will be sent before 2014 and distributed by the EFSF (the EU rescue fund), awaits the IMF's decision in March regarding the extent of its contribution, which the Eurozone hopes will be significant.

A lot of work is still to be done. For the Eurogroup it is essential that Greece is monitored and assisted on a technical level during the execution of the plan for cuts and reforms. Thus the individuals sent to the country by the EU, ECB and IMF will work there permanently. Furthermore, in order to ensure that Athens is not insolvent in the issue of their future bonds, the Eurozone will place the interest in a blocked account monitored by the troika.

Even the ECB will participate in the plan for aid, distributing the profits on Greek bonds to the national central banks in its portfolio. In turn the central banks will pay the gains to the states in the Eurozone which have agreed to send them to Greece as part of the plan to reduce its debt. The central banks holding Greek bonds will forgo profits until 2020 in order to cede them to Greece to alleviate its debt by 1.8 percent.

Lastly the agreement with the private sector foresees a 53.5 percent “haircut” (the percentage of reduction in a bond's value) of the bonds in the portfolio which will be swapped with longer-dated securities and have a coupon of 3 percent payable until 2014, 3.75 percent until 2020 and 4.3 percent after 2020. The bond swap will begin in the upcoming weeks and is voluntary, but the Eurozone awaits nearly 90 percent participation.

Experts say that the agreement represents a victory of the countries deemed most rigorous, especially the Netherlands. The fear is that the commitments made by Papademos' government will be disregarded by the majority which will be determined in the elections this April.

Satisfaction was expressed by Jean-Claude Juncker, president of the Eurogroup, for the agreement which assures the solidarity of the Euro. The president of the BCE, Mario Draghi, spoke of “a very good agreement”. Praise also came from the prime minister, Mario Monti, who called it a “nice outcome for Greece and the Eurozone”.

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Aug. 26, 2019

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