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Eurozone-IMF save Greece with new debt deal

Filed on November 27, 2012
Eurozone-IMF save Greece with new debt deal

ATHENS The eurozone and IMF saved Greece with a re-drawn rescue to avert bankruptcy and to cut the debt mountain on Tuesday which Greek leaders said marked a new beginning for their people facing yet further austerity in the midst of recession.

The deal marked a compromise by the IMF, an admission that Greece will need help with its debt for years, removes the risk of default around the end of the year, and minimises the chances that the country might have to leave the eurozone.

The deal struck in the early hours marks a “new day” for Greece, Prime Minister Antonis Samaras said after 13 hours of landmark negotiations in Brussels.

On financial markets, the euro initially climbed but then fell back, while shares rose in relief at the new breathing space for Greece.

This came in the form of approval for the latest slice of rescue funding to pay current bills, already agreed but tied to a new round of deep budget measures, and a new look at the huge mountain of accumulated debt.

“All Greeks have fought (for this decision) and tomorrow is a new day for every Greek person,” Samaras said in a message to the Greek people.

Former prime minister Evangelos Venizelos, now head of the Socialist PASOK party part of the ruling coalition, described the deal as “a new beginning.”

European Central Bank President Mario Draghi said that Greece must still meet a series of agreed conditions but “the decision will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece.”

Eurozone finance ministers agreed in principle to transfer, in four instalments from December to March, 43.7 billion euros ($57 billion) so that the country does not default at around the end of the year.

IMF compromise

They also adopted a new arrangement with the International Monetary Fund, a party to eurozone bailout packages, to slice more than 40 billion euros by 2020 from the debt owed by Greece.

German Finance Minister Wolfgang Schaeuble said the package would be presented to German lawmakers by the end of the week and the opposition leader said he would not stand in the way of a deal to keep Greece in the eurozone.

The techniques to reduce Greece’s debt will begin with a buyback by Greece of old debt that has fallen in value on commercial money markets. National central banks across the eurozone will forego profits on holdings of Greek debt which has slumped in value.

Interest rates due to eurozone creditors will also be trimmed or deferred — Ireland and Portugal can now be expected to demand parity — while maturity dates will be pushed back by years.

The IMF is pushing for a so-called “haircut” or write-down of debt by eurozone partner governments in the way banks wrote off most of the loans due to them earlier this year, but Germany is against this ahead of a general election next year.

But other Triple A-rated states have said they would “not exclude” the possibility of a write-down of debt from 2015 onwards.

The IMF in particular was held back by one of its principles that it should not lend if there is no medium-term prospect of debt falling to sustainable levels, but the problem of who will eventually carry the cost of the debt is a problem for the entire eurozone.

In London, the main FTSE stock index gained 0.40 percent, Frankfurt was up 0.40 percent and Paris 0.31 percent. The euro rose briefly above $1.30 in Asian trading for the first time for about a month, and was quoted later at $1.2947, down from $1.2971 late on Monday.

In London, the senior economist at Berenberg bank, Christian Schulz, commented that both the eurozone and the IMF wanted to see the results of a scheme for buying back Greek bonds before giving final approval and also eurozone countries had to approve the details at national level.

He noted: “The IMF compromised on its position that Greece needs to reduce public debt to 120 percent of GDP (gross domestic product) by 2020 and raised that target to 124 percent in 2020 but to 110 percent in 2022.”

The issue of the bond buyback “leaves some uncertainty over the deal,” he warned.

But government bond yields of Greece and other peripheral eurozone states, an indication of investor perception of risk, fell.

The yield on Greek 10-year bonds fell to 16.257 percent from 16.507 percent on Monday.

The biggest fall concerned 10-year Portuguese bonds for which the rate fell to below 8.0 percent, to 7.850 percent from 8.022 percent on Monday.

Spanish 10-year yields also fell to 5.587 percent from 5.620 percent, and for Italy to 4.752 percent from 4.754 percent.

The biggest fall concerned 10-year Portuguese bonds for which the rate fell to below 8.0 percent, to 7.850 percent from 8.022 percent on Monday.

Spanish 10-year yields also fell to 5.587 percent from 5.620 percent, and for Italy to 4.752 percent from 4.754 percent.

At BNP Paribas bank, bond strategist Patrick Jacq said that “in general terms, investors can again have confidence thanks to this agreement.”

IMF head Christine Lagarde said: “The IMF wanted to make sure the euro partners would take the necessary actions to bring Greece’s debt on a sustainable path”. She added: “I can say today that it has been achieved.”

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