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Greece gets 109-billion-euro bailout, banks to pay a third

Business Materials 22 July 2011 06:09
A special summit of eurozone leaders agreed late Thursday in Brussels that Greece should receive a new bailout worth 109 billion euros (157 billion dollars), and indicated that banks will be expected to cover about one third of the sum.
Greece gets 109-billion-euro bailout, banks to pay a third

A special summit of eurozone leaders agreed late Thursday in Brussels that Greece should receive a new bailout worth 109 billion euros (157 billion dollars), and indicated that banks will be expected to cover about one third of the sum, DPA reported.

Private lenders' contribution to the package was estimated at 37 billion euros. The new aid will add to the 110-billion-euro bailout that Greece secured last year from eurozone partners and the International Monetary Fund.

"The problems the euro area is facing could only be saved at the highest level. We had to act quickly - convening this meeting focused the minds and accelerated finding a solution," European Union President Herman Van Rompuy told reporters.

New loans to Greece will have a maturity of 15 to 30 years, with a grace period of 10 years, raised from 7.5 years in last year's bailout package. The interest rate will fall from 5.5-6 per cent to about 3.5 per cent.

Greece will have a "substantially" longer time to pay back its outstanding loans, euro leaders said, giving no details.

The summit declaration did not specify how private lenders are going to contribute, indicating they would chip in "on a voluntary basis through a menu of options," thought to include bond rollovers and bond buybacks.

A "debt buy-back programme" should reduce Greece's debt burden by 12.6 billion euros, the leaders said.

Acquisitions are expected be financed by the eurozone's rescue fund, the European Financial Stability Facility, provided all eurozone members and the European Central Bank (ECB) agree to it.

The ECB was concerned that letting traders take a loss on Greek loans would push credit-rating agencies to declare a selective default. In that case, the bank said it would stop giving credit to Greek private banks, which would trigger a banking crisis.

The "selective default" is now expected to take place, but to keep bank credit from drying up, leaders pledged to guarantee "continued access to euro-system liquidity operations by Greek banks" and to "provide adequate resources to recapitalize Greek banks if needed."

To reassure investors, the leaders stressed that Greece was an "exceptional" case, offered assurances that creditors would never be asked to take losses on any other euro area bonds and spelled out the "inflexible determination" of all other euro countries "to honour fully" their debts.

Leaders in the eurozone were under pressure to restore confidence in the currency and allay market fears that the debt crisis could spread to Italy and Spain, whose sovereign debt has been seen as increasingly risky by investors over the last two weeks.

In the hope of preventing contagion, the summit declaration heaped praise on both Italy's recently approved budget law and Spain's "ambitious reforms ... in the fiscal, financial and structural area."

The eurozone rescue fund's mandate was extended to help eurozone countries on the brink of crisis, such as Italy or Spain, with a provision to let it buy government bonds and pay for bank recapitalizations even in countries that have not been officially bailed out.

Several high-profile bankers from Germany, France and Greece were present in Brussels and were sounded out before the eurozone deal was announced. The package was first hammered out at a meeting in Berlin late Wednesday between German Chancellor Angela Merkel, French President Nicolas Sarkozy and ECB President Jean-Claude Trichet.

In Brussels, the new chief of the International Monetary Fund, Christine Lagarde, joined the discussions. The IMF has so far contributed about one third of the eurozone bailouts in Greece, Ireland and Portugal.

Several economists have recommended a more radical solution to the euro crisis: issuing joint eurobonds to eliminate risk differentials between Germany - the currency bloc's strongest economy - and cash-strapped members like Greece.

Analysts argue that giving debt-ridden governments access to cheaper financing would be less costly than additional eurozone bailouts. But Germany and other tightly run northern European countries are wary of letting profligate southern European peers piggyback on their financial reputations.

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