Europe Reaches a Greek Deal

WSJ: BRUSSELS—Euro-zone finance ministers early Tuesday agreed to an ambitious €130 billion ($172.1 billion) rescue deal that will see Greece's private creditors take an even larger loss in order to put the debt-laden country on a sustainable footing and avert a catastrophic default.

The agreement revolves around a debt exchange that calls for private investors to waive 53.5% of their principal under a massive debt swap that will cut Greece's outstanding debt stock by €107 billion. That goes beyond a 50% haircut agreed upon at a summit in October.

Speaking after the conclusion of more than 12 hours of negotiations, Eurogroup chairman Jean-Claude Juncker said the agreement "provides a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing, and hence for safeguarding financial stability in the euro zone."

The deeper private sector haircut will help bring Greece's debt as a proportion of gross domestic product to 120.5% by 2020 from over 164% currently.

That appears to satisfy the demands of the International Monetary Fund, which had insisted that the final targeted debt ratio be as close to 120% as possible in order to participate in the bailout.

The board of the IMF will decide on the size of its contribution to the enhanced bailout deal for Greece "in the second week of March," IMF managing director Christine Lagarde said Tuesday.

Ms. Lagarde's task of selling the deal to her board has been made easier by the fact that the final agreement assumes only a fractionally higher debt level for Greece in 2020 than the original deal struck in October. Various reports before the meeting had suggested that even this was viewed as unsustainable within the Fund.

"The deal is a good result for Greece, the euro zone and for the markets, we hope," Italian Prime Minister Mario Monti told reporters on leaving the meeting.

The agreement also spares the European Central Bank, as well as national central banks, from taking any losses on their holdings of Greek debt.

Instead, the ECB will disperse any profits it makes on the portfolio of bonds it holds under its Securities Markets Program "in line with the ECB's statutory profit distribution rules," Mr. Juncker said. In addition, national central banks in the euro zone will transfer to Greece any profits arising from those Greek bonds they hold as investments.

The ECB had resisted pressure to accept "haircuts" of its own on either of the €12 billion in Greek bonds that national central banks hold as investments, or on the much larger portfolio of bonds—estimated at around €45 billion—that the ECB bought through its Securities Markets Program.

ECB President Mario Draghi had insisted that the only way for the ECB to contribute legally to any form of debt relief would be to realize the profits on the SMP portfolio would be to hold the bonds to maturity, and disburse the profits to national central banks, who could then pass them on to governments. The governments may then take the political decision to offset the profits against the cost of new loans.

Greece's official creditors also agreed to reduce the interest-rate payable on loans disbursed under its first bailout program, agreed to in 2010, in what could shave €1.4 billion off Greek debt, according to Mr. Juncker.

However, the success of the bailout depends on how private-sector investors will receive changes in the parameters for a "voluntary" swap of their Greek bondholdings.

"All is still pending what the reaction of the private sector" will be, German Finance Minister Wolfgang Schäuble said.

Greece is expected to launch the bond-swap offer in coming days facing a tight deadline for a major bond repayment due March 20. The deal hinges on 100% acceptance by private sector holders of some €200 billion of Greek debt.

The body representing Greece's private-sector creditors said Tuesday it recommends they "carefully consider" the new deal.

The International Institute of Finance said it viewed the deal "as building upon, and being broadly consistent with, the voluntary agreement reached with euro-area authorities and the [IMF] in Brussels on October 27, 2011."

It stopped short of any clearer endorsement of the deal, which will force bondholders to trade their existing bonds for new bonds offering a coupon of 2% until 2014, 3% between 2015 and 2020, and 4.3% thereafter.

For every €100 in bonds tendered in the debt swap, bondholders will receive new Greek bonds with a face value of €31.5 and short-term paper issued by the European Financial Stability Facility with a face value of €15.

The new bonds will have maturities of between 11 and 30 years, "replicating an amortization of 5% per annum commencing in 2023," the IIF said.

If the deal isn't taken up by enough investors, the Greek government may enact a new law that would retroactively apply "Collective Action Clauses" to the bonds, allowing it to force through the debt restructuring.

That would have the effect of turning what is supposed to be a voluntary debt restructuring into a coercive one, leading ratings firms to declare the government in default and triggering credit default swap contracts. However, the risk of that default turning disorderly has been reduced by a separate deal between Greece and the ECB, and by the fact that Greek banks that are currently borrowing from the ECB against Greek collateral will receive new, non-defaulted bonds to replace them in the course of the debt swap.

Greek Prime Minister Lucas Papademos said he expects the massive debt restructuring to be completed by April. Mr. Papademos said it is vital that both his government, and the one that succeeds it after elections in April, must stick to the terms of the deal.

In what sets a new landmark for the willingness of the euro zone to intrude on member states' traditional fiscal rights, Greece will be subject to increased external control and scrutiny in exchange for the bailout. Euro-zone finance ministers agreed that a task force by the European Commission will have an "enhanced and permanent" presence in Greece to ensure that the country implements a raft of painful reforms attached to the deal.

In addition, Greece undertook to transfer its debt servicing payments into a blocked account one quarter in advance. It also promised to enact legislation giving priority to debt servicing over other government spending "over the next two months" and to enshrine that principle in its Constitution "as soon as possible", Mr. Juncker said.

French finance minister François Baroin said Greece will be monitored and will be advised on its recovery effort, but will by no means be placed under "special administration", or guardianship.

 

Write to Geoffrey T. Smith at Ainsley Thomson