EU and IMF give go-ahead for next stage of Greece's bailout
Published 04/06/2011 | 05:00
THE European Union and the IMF will pay the next installment of the €110bn Greek bailout and are ready to extend the programme. The news ends speculation that Greece would be forced into a disorderly default on its government debt later this summer.
For the first time since the start of the debt crisis, bondholders will have to bear some of the burden of keeping the country from insolvency.
Yesterday, officials from the troika of IMF, EU and ECB that manages all three bailout programmes finished a review of the country's economic progress. The review ended positively, allowing funds to be disbursed on time.
The plan still needs to be formally signed off by eurozone finance ministers, but there is a general sense that Greece has pulled back from the brink, at least for now. The Greek elements of the deal still have to be signed off by the country's cabinet and parliament.
A new deal for Greece means that -- although it is far from over -- the European debt crisis has entered yet a new phase. For the first time, all three of the weakest euro currencies now have guaranteed medium-term financing from the rescue funds.
For the time being, the crisis should play out in the corridors of power rather than the markets.
Yesterday, Greek Prime Minster George Papandreou flew to Brussels to meet Luxembourg Prime Minister Jean-Claude Juncker who heads up the euro group that confirmed banks that held Greek bonds would have to participate in the new programme.
"I expect the eurogroup to agree additional financing to be provided to Greece under strict conditionality," Mr Juncker said.
"The conditionality will include private sector involvement on a voluntary basis."
That involvement is understood to mean asking banks to roll over Greek government debt as it falls due.
If that does happen, the new bailout loans will be smaller, because additional funds to meet maturing debt won't be needed. It will also give comfort to voters in Finland and Germany who have railed against the perceived costs of the bailouts.
Analysts at ING in the Netherlands reckon about 55pc of investors in Greek government bonds are likely to roll over the debt. As well as offering higher interest as a carrot, European banks will come under pressure in their home markets from political leaders keen to see the deal succeed. In the current climate, few big banks will be able to resist such pressure, especially if it means bonds they currently hold can be used.
Greece, in turn, will establish an agency to manage an accelerated asset-sale of €50bn of state-owned assets by the end of 2015. It will also make "significant" cuts in public-sector employment, according to a statement released yesterday in Athens.
The yield on Greek two-year government bonds fell to the lowest level in five weeks, after the new deal was announced. The yield fell 1.46pc yesterday alone to a still high 23.1pc. Greek 10-year bonds dropped to 15.543pc. Irish 10-year bond yields fell to 10.359pc, down nearly a quarter of a per cent. (Additional reporting Bloom- berg)