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Eurozone opts to keep Greece in the family
Europe opted yesterday to keep Greece in the 17-nation eurozone, agreeing a huge financial lifeline worth 237 billion euros but demanding Athens meet a long list of conditions first. The decision, reached after a marathon 13 hours of negotiations with private creditors and the International Monetary Fund, should avert a messy bankruptcy, but leaves Greece facing years under European Union wardenship.
After weeks in which some in the single currency area raised the spectre of cutting Athens adrift, Italy’s Prime Minister Mario Monti said the agreement represented “a good result for Greece, the markets and the eurozone.” Greek Prime Minister Lucas Papademos, who with European backing heads an emergency coalition government, pronounced himself “very happy,” after personally shuttling in and out of talks with top bankers.
European markets reacted by pushing the euro higher, but major stock markets showed losses in midday trading, in part because an agreement had been widely anticipated. The chief negotiator for the private creditors now facing a 53 percent loss on their Greek holdings -- Charles Dallara of the Institute of International Finance (IIF) -- said the deal offered a sign that the troubled euro may be emerging from the danger zone. “I would not want to say that this is a definitive turning point. I do feel that it is part of a turning process,” said Dallara, who heads the Institute of International Finance (IIF). “You now have the seeds planted I think, firmly moving toward a restoration of confidence in the eurozone.”
But economists injected a dose of scepticism, focusing on a giant task ahead of Greece to get its crushed economy growing again, and also casting wary eyes on other countries that could now face pressure - namely Portugal, and even France. “Even with this agreement, most of Greece’s problems lie ahead of it, not behind,” said Brussels-based commentator Sony Kapoor.
Luxembourg Prime Minister Jean-Claude Juncker formally announced a deal shortly after 5:00 am (0400 GMT), saying the “comprehensive blueprint” would “secure Greece’s future in the eurozone” and safeguard eurozone financial stability. However, he spelled out a series of conditions -- including a time-limited rewrite of the Greek constitution -- to be met before eurozone governmental loans of “up to 130 billion euros until 2014” could be handed over.
The $310 billion bailout, obtained after 3.2 billion euros in spending cuts were rammed through the Greek parliament during violent protests, also depends on bond-holders agreeing to a deal to wipe 53.5 percent off the paper value of privately-held Greek sovereign debt. Negotiators for the banks said this should deliver 107 billion euros in cuts to Greece’s 350-billion total debts. The eurozone will decide whether this exchange of devalued old bonds for new IOUs has been “successful” in early March, Juncker said. The goal now is for Greece’s public debt to fall to 120.5 percent of gross domestic product (GDP) by 2020, instead of the present 160 percent. Athens should in the meantime be relieved of pressure ahead of debt repayments of about 14.4 billion euros on March 20. But the package is still contingent on changes to be implemented in Greece by the end of February -- as well as the “permanent” presence of EU and IMF officials on the ground in Athens to run the rescue programme.
Athens is expected to anchor in its constitution within two months legal provisions for “ensuring that priority is granted to debt servicing payments,” in a bid to protect public lenders’ interests first. European Central Bank (ECB) chief Mario Draghi noted that “the implementation of the agreement must be rightly monitored.” The euro jumped more than one US cent on news of the deal, but later gave up some of its gains.
Markets are concerned that the wider eurozone picture remained unclear, with analysts expecting Portugal, another fragile euro state, to need a revised bailout later this year. Berenberg bank analyst Christian Schulz raised questions about the stability of France, the European nation most heavily exposed to Greek debt.
Still, Britain’s George Osborne said the eurozone was “collectively standing behind their currency -- which is something that Britain has urged them to do all along. “That’s been the crucial missing ingredient,” he added. Of as much interest to traders, meanwhile, would be moves, according to EU economic affairs commissioner Olli Rehn, to increase the effective lending capacity of the bloc’s more comprehensive financial firewall to 750 billion euros.
EU leaders will tackle this question at a March 1-2 summit. They would achieve that goal by merging the 500 billion euros contained in a new rescue fund to become operational in July with 250 billion left over in a temporary pot constructed in the wake of the first, failed Greek bailout. IMF chief Christine Lagarde said the Fund will fix its contribution to the revamped Greek bailout in the second week of March; under a 110-billion-euro deal approved nearly two years ago, the Washington-based lender of last resort was responsible for roughly one third of cash loans.
,G20 countries, who meet in Mexico later this week, are to mull a potential boost to IMF resources. An EU-IMF report leaked during the overnight talks showed that in the worst-case scenario, Greece would need a whopping 245 billion euros in bailout aid by 2020.
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