- At the eleventh hour, the Eurogroup and the International Monetary Fund (IMF) reached agreement on the latest version of the Greek rescue program
- This result opens the way to the release of loan tranches currently suspended (€43.7bn to be paid by the end of the first quarter of 2013)
- The maturity of official loans to Greece has been extended; interest rates have been reduced; the first interest payments to the EFSF have been postponed
- The ECB will hand back to Athens the profits on its holdings of Greek debt
- The Greek government will conduct a buy-back of its debt (at a discount) for a total value which remains to be determined
- The new program aims to cut public sector debt from 176% of GDP in 2012 to 124% of GDP in 2020 and then 110% in 2022
- All that remains is for Greece, which has been in recession for the past five years, to return to growth
On 27 November 2012, the IMF and the Eurogroup, which brought together the finance ministers of the eurozone countries, reached an agreement on modifications to the Greek finance package agreed in February 2012. The IMF was in favor a "haircut," a reduction in the nominal value of Greek debt, which is now mainly held by official lenders and which the IMF argued is unsustainable in its current form. Such a move would be politically difficult in Europe, especially in Germany, where legislative elections are due within a year.
In the end, although a haircut was avoided, a whole raft of measures was introduced to reduce Greece’s financing requirements between now and 2016 and help move public sector debt towards the new target of 124% of GDP in 2020. A buy-back of debt at discounted prices has also been put in place. The outcome of this move is still uncertain, but would appear to determine the chances of success of the overall rescue package. We review below the main points of the agreement and analyse their effect on the sustainability of Greek debt.
The agreement
Since the elections in June 2012, the new Greek government has made the renegotiation of the terms of European aid one of its key objectives. It recently won a two-year extension in the timetable for reducing the deficit, delaying from 2012 to 2016 the target date for a primary surplus of 4.5% of GDP.
By Thibault MERCIER
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