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How Greece could be saved at Thursday's eurozone summit

Other News Materials 20 July 2011 20:25
European Union leaders are expected to craft a second rescue package of up to 120 billion euros (170 million dollars) for highly indebted Greece when they gather for a special summit in Brussels on Thursday.
How Greece could be saved at Thursday's eurozone summit

European Union leaders are expected to craft a second rescue package of up to 120 billion euros (170 million dollars) for highly indebted Greece when they gather for a special summit in Brussels on Thursday, dpa reported.

A set of measures to protect the bankruptcy-threatened country, which only last year received a 110-billion-euro bailout, will be under discussion, according to Belgian Finance Minister Didier Reynders.

The following issues are to be considered, according to Reynders and Brussels diplomats:

- FRESH LOANS: Greece is to receive new loans, after the first package it received last year proved to be insufficient. It is widely believed that the eurozone's bailout fund, the European Financial Stability Facility (EFSF), will be involved. It did not exist when Greece was bailed out the first time.

- CHEAPER LOANS: The interest rates on loans for Athens are to be reduced further, while their lifespans are to be extended.

- BANK INVOLVEMENT: Banks and insurance companies are to shoulder a portion of the new bailout. So far, up to 30 billion euros have been mentioned.

Germany, the Netherlands and Finland have led the charge on getting the private sector involved. But the approach is politically controversial, with the European Central Bank (ECB) opposing it.

The ECB fears that rating agencies will deem the move equivalent to a default, prompting a chain reaction on the financial markets. It has also threatened to no longer accept Greek bonds as collateral for lending to Greek private banks. The ECB's stance is supported by France and Spain, among others.

- ROLLOVER APPROACH: A possible option for bank involvement, it calls on creditors to voluntarily re-invest maturing Greek loans into new bonds with extended lifespans of up to 30 years. A selective default is said to be under consideration in connection with this scenario.

- NEW TASKS FOR BAILOUT FUND: The EFSF could help siphon Greek bonds from the market, leaving traders to take a loss on the bonds, which are currently undervalued.

It could, for instance, give money to Athens to buy back bonds and reduce its debt mountain, which has reached almost 160 per cent of gross domestic product. This approach, however, is seen as comparatively expensive.

Another variation calls for the fund to buy up bonds directly from traders on the secondary market. For the EFSF to do that, its operating rules would have to be amended. Member states are already in the middle of ratifying one round of changes, after the EFSF's lending capacity was increased from 250 billion euros to 440 billion euros.

- FINANCIAL TAX: Another option for bank involvement, it could avert the risk of a default. All banks would be affected, even if they are not exposed to Greek debt. But the implementation of such a tax is seen as difficult, as it would have to be legally adopted in all 27 EU member states. It could, however, generate up to 10 billion euros a year.

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