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by Euro Reporter
2011-07-22 09:31:38
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Greece to default as EU agrees €159bn bailout

Greece is set to lead the eurozone's first-ever default as European leaders agreed that the private holders of Greek debt will take a hit of €50bn over three years. Breaking weeks of deadlock, the heads of the 17 eurozone governments conceded that a "controlled" failure was the only way to prevent the collapse of the single currency and a global financial rout. As part of the deal Greece will also receive another bailout package - from Europe, the International Monetary Fund and the private sector - worth €159bn. The second bail-out, which follows the €110bn rescue funds agreed last May, will cut Greece’s debt by a quarter. The private sector will provide €49.6bn via a variety of measures in the next three years including a €12.6bn debt buy-back programme. The fresh rescue attempt has been agreed to “decisively improve the debt sustainability and refinancing profile of Greece”.

In a bid to prevent the contagion seeping out across Europe, Brussels was granted radical new economic powers that pave the way for far greater economic union between members. The eurozone's bailout fund, the European Financial Stability Facility (EFSF), was boosted with unprecedented powers of intervention and fundraising. The leaders also agreed to new governance commitments which Nicolas Sarkozy said would lead to greater economic integration. Experts described the deal as a "significant step towards financial integration in Europe". Releasing the agreement on Thursday night, Herman Van Rompuy, president of the European Council, said: "I am glad to announce that we found a common response to the crisis situation. We improved Greek debt sustainability, we took measures to stop the risk of contagion and finally we committed to improve the eurozone's crisis management."

In Brussels, the governments insisted that Greece was "a uniquely grave situation in the Euro area". In the draft agreement, the 17 leaders agreed that "all other euro countries solemnly reaffirm their inflexible determination" not to default. However, the leaders moved to stand behind other indebted countries, too. The interest rates charged by the EFSF to the bailed-out countries – Greece, Ireland and Portugal – are set to be lowered to around 3.5pc. The draft document also repeated the commitment of Italy and Spain to lower their deficits while pledging that "Member States will provide backstops to banks as appropriate". The markets reacted with relief that the deadlock that has paralysed the crisis talks looked set to be broken. Stock markets across Europe rose - some to their highest level for two weeks. In the UK, the FTSE100 rose 0.8pc and the FTSE Eurofirst 300 index was up 1.3pc. The euro was up more than 1pc and rose as high as $1.4401 as traders said that the agreement "took the heat off the ECB for the moment". In the credit markets, the yields on Italian, Spanish and Greek bonds declined sharply.


Banks forced to share pain of bailout for Greece

Eurozone leaders finally capitulated to the inevitable last night and agreed to restructure Greece's unsustainable €350bn (£310bn) national debt in return for a second bailout package for the country. There will be some €109bn from European governments, plus about €50bn from the banks over the next five years, with further contributions from them to follow. The private sector's contribution will build to €106bn by 2020, the EU predicts. Greece, Ireland and Portugal will benefit from a longer time to pay their existing rescue packages plus a lower interest rate – a particularly welcome result for Dublin. President Nicolas Sarkozy of France heralded new powers for the existing bailout fund with the prediction that it would become a "European IMF" – a substantial quickening in the pace of what Mr Sarkozy called "European economic governance".

Some EU insiders are calling it a "quantum leap", though it has, as yet, had no extra funds devoted to it. It follows comments in London by the Chancellor, George Osborne, that he supported the eurozone as whole issuing bonds, so called "Eurobonds" – a move that would further isolate the UK from European decision-making. Meeting under enormous pressure to get a grip on the crisis, the 17 heads of government signed off a new lifeline, with private investors for the first time shouldering a large share of the burden, though on a voluntary basis. The deal goes a long way towards meeting demands by the German Chancellor, Angela Merkel, that banks be made to "share the pain" of bailouts. Senior officials from leading European banks, who also met at the summit venue, agreed to provide about 20 per cent of the funding by 2014. Ms Merkel said: "We met here under very difficult circumstances and as eurozone countries we've shown that we're now up to dealing with this crisis and we're taking responsibility for Europe and for our single currency. What we [as Germans] are now doing for the euro, we are getting back many times over in terms of benefits for our country."

Markets responded favourably to the deal. Bank shares and the euro, which had seen some volatile trading, stabilised as details of a draft agreement emerged. The banks that do decide to accept a discount on their bond holdings will lose about 21 per cent of their face value. Much, however, still depends on what market analysts make of the detail of the deal, and whether the credit ratings agencies will declare it a "credit event". If they do, and choose to view it as a "selective" default, it could still trigger a panic. The danger is that investors may conclude that the discounts now being applied, albeit voluntarily, to the holders of Greek government debt could be applied equally to Portuguese, Irish and – most dangerously – Spanish and Italian government bonds. Should the interest rates demanded by investors to hold Spanish and Italian government bonds rise much more they would threaten a much larger default and sovereign debt crisis for the eurozone, and call into question the euro itself.


Greece’s Brady Plan, Finally

The International Institute of Finance, a consortium of the largest global banks, just released a term sheet for a Brady-type Plan for Greece. The menu of options includes a Par and Discount Bonds, with principal collateral, and a buyback option.  The coupon on the 30-and 15-year Par Bonds will step-up from 4-5 percent.  The Discount Bond, which includes a 20 percent haircut at exchange, will have a 5.9 percent coupon and 30-year maturity. 

Europe finally gets it and is beginning to address the periphery’s structural debt overhang, though the term sheet says the deal is “unique” to Greece due their “exceptional circumstances.  Many of Europe’s largest banks have already signed on to the deal, including Deutsche Bank BNP Paribas, Société Générale, Commerzbank, and ING. The haircut, some will no doubt argue, may not be big enough, but it’s a start.  European bank stocks were up big today, some almost 10 percent.  Our sense, the markets will like it, but you never know.  We need to further analyze the term sheet and will get back to you.  Stay tuned!

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