Athens/London: Greece said a second bailout had bought it breathing space and pledged no let-up in its drive to cut a still-mountainous debt which economists expect to force a deeper restructuring in the future.
An emergency summit of leaders of the 17-nation currency area agreed a second rescue package on Thursday with an extra €109 billion ($157 billion) of government money, plus a contribution by private sector bondholders estimated to total as much as €50 billion by mid-2014.
The leaders also made detailed provisions for limiting the damage if, as seems likely, credit rating agencies declare Greece to be in temporary default -- the first such event in the 12-year history of the euro.
“There is a great breath of relief for the Greek economy and this will gradually pass on to the real economy,” Greek finance minister Evangelos Venizelos told reporters on Friday.
“But by no means, does this mean we can relax our efforts.”
Doubts remain about whether the plan went far enough to assure not only Greece’s debt sustainability but that of Ireland, Portugal and other debt-burdened nations.
The package yielded “more than expected but not enough to make us sleep comfortably”, Barclays economists said. They were disappointed that European leaders did not agree to expand a euro zone rescue fund.
Among other steps, the leaders agreed on Thursday to ease terms on bailout loans to Greece, Ireland and Portugal; maturities will be extended to 15 years from 7.5 and interest cut to around 3.5% from 4.5-5.8% now.
But if market conditions deteriorate and a larger European economy -- Italy, for example -- struggles to shoulder its debt burden, the rescue fund could be quickly wiped out.
French President Nicolas Sarkozy said measures agreed at the summit, the fifth this year on the crisis, would reduce Greece’s debt by 24 percentage points of gross domestic product from about 150% on Friday.
That still leaves a colossal debt for an economy deep in recession which does not have the option of a competitive devaluation.
What is more, the figures are based on what analysts say are optimistic projections for growth and returns from a sweeping privatization programme.
“Our estimates suggest that Greek debt/GDP ratios will fall around 25 percentage points over 5 years as a result of these measures but will still be a whopping 120% in 2016 even assuming that the full €50 billion of privatization measures are implemented,” analysts at JP Morgan said in a note.
“We therefore believe that spreads will widen again as short covering dissipates and reality sinks in.”
The euro brushed close to a two-week high, prices for Greek, Irish and Portuguese bonds jumped and the cost of insuring their debt tumbled on Friday. But traders said expectations of a larger restructuring down the road were undimmed.
The European leaders’ promise of a “Marshall Plan” of European public investment to help revive the Greek economy, may help, though details were thin.
The ratings agencies may come out at any time with their likely verdict of default since banks and insurers are likely to write down the value of Greek bonds by around 20%, with more losses maybe to follow.
“We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date. To give Greece a fighting chance they probably need a write down close to 65%,” said Gary Jenkins, head of fixed income research at Evolution.
Under the bailout of Greece, which supplements a €110 billion rescue plan by the European Union and the International Monetary Fund in May last year, banks and insurers will voluntarily swap their Greek bonds for longer maturities at lower interest rates to help Athens.
The region’s rescue fund, the European Financial Stability Facility, will be allowed to buy bonds in the secondary market if the ECB deems that necessary to fight the crisis.
It can also for the first time give states precautionary credit lines before they are shut out of credit markets, and lend governments money to recapitalize banks -- both moves which Germany blocked earlier this year.
The expanded EFSF role is designed to prevent bigger euro zone states such as Spain and Italy from being excluded from markets because of fears of a weaker country defaulting.
The Institute of International Finance, which led talks for the private sector, said their actions would help reduce Greece’s €340 billion debt pile by €13.5 billion.
Derivatives body ISDA told Reuters that the plan would not trigger a “credit event” and payment of credit default swaps contracts -- a form of insurance against default -- because it was voluntary.
The summit accord was based on a common position crafted by German Chancellor Angela Merkel and Sarkozy in late night talks in Berlin on Wednesday with ECB President Jean-Claude Trichet.
The ECB relented and signalled it was willing to let Greece default temporarily under the plan, although Trichet told reporters he did not want to prejudge whether that would occur.
Thursday’s summit is unlikely to mark a quick or complete resolution of the crisis, however, as Merkel herself acknowledged earlier this week.
Many economists believe the only way out of the euro zone’s debt crisis in the long run may be closer integration of national fiscal policies -- for example, a joint euro zone guarantee for countries’ bonds, or issuance of a joint euro zone bond to finance all countries. Germany has opposed this.
Sarkozy, at least, is looking to more sweeping reforms.
He said France and Germany would make proposals by the end of August on how to improve the governance of the bloc, to “clarify our vision of the future of the euro zone”.
“We have agreed to create the beginnings of a European Monetary Fund,” he said of the EFSF’s new powers.