Greek’s Latest Fix—A Step Towards Stabilizing the Euro For Now

A Greek deal is finally done… for now.  It was between reducing the debt to 120% of GDP by 2020, or 110% by 2022 but with more debt relief and haircut on Greek paper.

They agreed on 124% by 2020.

The €34.4 billion in aid owed from June would likely be disbursed on 13 December pending approval by national parliaments.  The remaining € 9.3 bn of overdue aid will be paid out in 3 tranches during Q1 of next year provided tax system reform is met in January.

A bond buyback plan will have to be successfully completed alongside various measures aimed at helping to reduce the debt burden by 20% of GDP, i.e., prevent debt/GDP ratio from reaching the projected 144% in 2020.

The measures include:

i) 100 bp-cut on the interest rate charged on Greek bilateral loans from Eurozone governments;

ii) Extending maturity on Greek loans from European Financial Stability Facility bailout fund by 15 years and delaying interest payments by 10 years, while reducing the interest rate by 10 basis points; and

iii) A plan to reduce Greece’s level of debt to 124% of GDP by 2020 and below 110% by 2022.

Debt forgiveness, maturity extensions and interest rate cuts are increasingly becoming an option in the latest debt negotiations for a country that is deemed to have done its part in starting and sticking to reforms.  This has occurred to the extent that the ball remained in court of the IMF and EU. Yet it is one thing or troika to agree on the Mathematics of the debt reduction, and another matter is to assess the probability of slashing the debt from 175% in 2016 to 124% in 2020. The IMF goes further and is expecting 110% by 2022.

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Provided by FX Solutions LLC per information from Associated Press, Eurozone finance ministers reach deal on Greece bailout, November 26, 2012.

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