Eurozone leaders have, according to a draft statement issued during their meeting in Brussels, agreed to extend the maturity of loans to Greece from 7.5 years to 15 and to reduce the interest rate from 4.5 percent to 3.5, while also giving the European Financial Stability Facility substantially greater flexibility.
It appears that a more comprehensive plan to assist debt-burdened Greece will involve a form of private sector participation that could lead to rating agencies deeming Athens to be in ?selective default.?
The leaders of the 17 countries have also agreed to provide further emergency loans to Greece. The amount has not yet been specified but it is expected to reach as high as 71 billion euros.
“We agree to support a new program for Greece and to provide an additional amount of up to (figure yet to be determined),? the leaders said in their draft statement. ?This program will be designed, notably through lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece. We call on the IMF to contribute to the financing of the new Greek program in line with current practices.
“We have decided to lengthen the maturity of the EFSF (European Financial Stability Facility) loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years.?
The eurozone leaders also called for the setting up of a ?Marshall Plan? for Greece that would help stimulate its flagging economy. The details of the plan remain vague.
“We call for a comprehensive strategy for growth and investment in Greece,? the leaders said in their draft statement. ?Structural funds should be re-allocated for competitiveness and growth under a European ‘Marshall Plan.’ Member States and the Commission will mobilize all resources necessary in order to provide exceptional technical assistance to help Greece implement its reforms.”
The eurozone is also looking to private investors to contribute to the package for Greece. This has been made easier by the European Central Bank backing down on its previous insistence that it would not accept defaulted bonds from Greece. Credit rating agencies are likely to declare Greece to be in selective default following the announcement of the new package.
“Greece is in a uniquely grave situation in the Euro area,? the draft statement read. ?This is the reason why it requires an exceptional solution. The financial sector has indicated its willingness to support Greece on a voluntary basis through a menu of options (bond exchange, roll-over, and buyback) at lending conditions comparable to public support with credit enhancement.”
Significantly, the eurozone leaders also agreed to giving the EFSF, set up in the wake of the debt crisis to provide funding to Greece, Ireland and Portugal, greater flexibility, including the ability to provide funding to banks.
“To improve the effectiveness of the EFSF and address contagion, we agree to increase the flexibility of the EFSF, allowing it to:
– intervene on the basis of a precautionary program, with adequate conditionality;
– finance recapitalization of financial institutions through loans to governments including in non programme countries;
– intervene in the secondary markets on the basis of an ECB analysis recognizing the existence of exceptional circumstances and a unanimous decision of the EFSF Member States.”