The 17 euro-zone finance ministers broke their deadlock with the International Monetary Fund on Monday night and agreed to release the next tranche of aid for Greece, which will receive a total of €44 billion starting next month in four installments to be paid by the end of March 2013.
The December installment will comprise €23.8 billion for banks and €10.6 billion in budget assistance.
At their third meeting in as many weeks, the ministers also agreed a further set of measures to reduce Greece's debt burden by 2020.
They didn't have much time left. Greece's debt is rising faster than expected because the country remains mired in recession and has been slow to implement reforms. As a result, the Euro Group of finance ministers had to revise its targets for long-term debt reduction.
Under the new agreement reached after 12 hours of talks in Brussels, Greece is now being required to cut its debt-to-GDP ratio to 124 percent by 2020, compared with a previous target of 120 percent that is regarded by the IMF as the maximum sustainable level.
In order to persuade the IMF to make that concession, the euro nations committed themselves to reducing Greece's debt to below 110 percent by 2022. This is likely to force Greece's government creditors to write down their debt in the medium term -- even though ministers rejected that step on Monday.
There was relief all round after the talks. Two previous marathon meetings had failed to produce an agreement. But the ministers had no choice but to come up with a deal this time.
'The Timetable is Tight'
"This is not just about money," said Euro Group Chairman Jean-Claude Juncker. "This is the promise of a better future for the Greek people and for the euro area as a whole, a break from the era of missed targets and loose implementation towards a new paradigm of steadfast reform momentum, declining debt ratios and a return to growth."
German Finance Minister Wolfgang Schäuble said: "We now have a result that we can submit to our parliaments for discussion and approval." He said he hoped the German parliament would approve the deal by Friday. "The planned timetable is tight."
Officially, the new measures to cut Greece's debt burden haven't been referred to as a third bailout package because they don't involve granting fresh loans. But they will still cost the international creditors money. The package consists of four elements:
- An interest rate cut on debt from the first bailout package. In 2010, euro-zone member states granted Athens bilateral loans totalling €53 billion at an interest rate that has so far been the equivalent of the Euribor reference rate (the Euro Interbank Offered Rate), plus 1.5 points. The latter value is now to be cut to 0.9 points and later to 0.5 points as soon as Athens generates a primary budget surplus -- a measurement which excludes interest payments on sovereign debt -- of 4.5 percent of GDP. It's unclear how much that will save the Greek state, but the sum will amount to billions of euros. The German government's annual loss of revenue will exceed €100 million.
- Athens has also been granted a 10-year interest rate deferral on debt from the second bailout package. In addition, the term of the loans paid to Greece by the temporary rescue fund EFSF in March will be doubled to 30 years from 15 years. According to the EFSF, the move will ease Greece's debt burden by €44 billion.
- The euro-zone ministers also agreed to launch a voluntary debt buyback of Greek debt and will offer private investors 35 cents for each euro of bonds they hold. At present those bonds are being traded at 20 to 30 cents, depending on their maturity. In theory, Greece's debt burden could be eased at a relatively low cost in this way. The problem is that the prices of the bonds are likely to increase because of the buyback announcement, and this could deter investors from selling their bonds. So it's unclear whether the buyback scheme would cut Greece's debt-to-GDP ratio by much. And there's no decision yet on where the money for the buyback will come from.
- The euro-zone central banks promised to hand back €11 billion in profits accruing to them from European Central Bank purchases of discounted Greek government bonds in the secondary market.
This catalogue of measures will likely suffice to avert a Greek bankruptcy for quite some time, assuming its recession doesn't get even worse. But it doesn't solve the Greek dilemma. It has been three years since Athens triggered the debt crisis by admitting it had hidden the extent of its budget deficit. But after two rescue packages, a debt cut for private creditors and countless austerity programs, Greece's debt is still rising. Next year it's expected to reach 190 percent of GDP, according to an estimate by the troika of European Commission, European Central Bank and IMF.
Many economists believe that Greece's state finances can only be reformed in a sustainable way with a second debt cut. But the finance ministers refrained on Monday from taking that step because it would force them to book actual losses on their loans to Greece for the first time.
The German government in particular, which faces an election in the autumn of 2013, doesn't want to go into the campaign facing accusations that it frittered away taxpayers' money. Schäuble denied on Monday that Germany was alone in rejecting a debt writedown. But Germany is the decisive force blocking a cut.
IMF chief Christine Lagarde failed to persuade Schäuble to back a writedown, but the row is likely to flare up again at a later date. And the German minister hinted at a possible concession further down the line.
"When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," he said.