Library Briefing Library of the European Parliament 16/03/2012 Greek debt restructuring Greece has recently secured a deal with private- offer, exceeding expectations. Major banks and sector lenders to ease its financial situation. Its other creditors were asked to accept up to 75% government announced that 85.8% of the losses on the value of their bonds, wiping out investors had agreed to participate in its debt €106 billion of Greek debt, instead of facing restructuring. Implementing this deal will make the possibility of getting no money back. it possible for Greece to receive further bailout Participation will rise to 95.7% as collective funds from the European Union (EU) and the action clauses have been activated to bind International Monetary Fund (IMF). unwilling creditors to the agreement. (The remainder is made up of foreign-law bonds, The economic crisis in Greece whose private-sector holders have until 23 In October 2009, the new Papandreou March to tender them for exchange.) government announced that previous The great majority of private holders accepted administrations had falsified budget figures to to swap their old bonds for new debt cover up a growing debt. In May 2010 the instruments with lower face value and European Commission, the European Central generating lower interest. With repayment Bank and the IMF agreed on a first €110 billion dates further in the future, Athens gains extra loan. In return, the Greek government adopted time to repay part of its debts. After the debt major public-sector cuts, reducing pensions, swap deal, Greece's total debt still amounts to salaries and jobs, implemented austerity about €254 billion. Athens will therefore still measures, and introduced a property tax to rely heavily on bailout funds from external lower the deficit and restore confidence on actors. international markets. These measures triggered massive protests and social unrest in Minister Venizelos affirmed that "creditors Greece, especially at the time the Parliament have supported our ambitious programme of approved the first aid package. reforms and have shared the sacrifices of the Greek people". He also promised that Greece In autumn 2011, Eurozone countries agreed on will continue implementing the measures and a second bailout, but the Greek government structural reforms to which it has committed found it difficult to accept the conditions itself. Prime Minister Lucas Papademos, in a imposed. An ad-hoc referendum on the television statement, flagged the debt swap package was announced by Papandreou, but deal as a "window of opportunity and hope". EU leaders immediately put pressure on him, But he recognised that "investors and leading to him backing down. On 11 depositors, including citizens, are suffering November 2011, George Papandreou resigned considerable losses", factors which oblige and Lucas Papademos was appointed Prime Greeks to learn from past mistakes. Minister of a national unity government, with the main objective to implement reforms and Reactions secure the second bailout loan. The International Swaps and Derivatives Association (ISDA) confirmed that the Greek Debt swap deal debt swap deal is a restructuring credit event The plans for the debt swap deal were affecting all bond holders, following the approved by the Greek Parliament in February activation of collective action clauses. 2012 as a precondition for receiving the €130 billion necessary to avoid bankruptcy. Stock markets reacted positively to the deal. Olli Rehn, EU Commissioner for economic and Greek Finance Minister Evangelos Venizelos monetary affairs, welcomed the swap deal, announced on 9 March that 85.8% of the expressing satisfaction at the "large positive private creditors who held €177 billion in turnout of the voluntary debt exchange". Greek bonds had accepted the debt swap Author: Francesco Pontiroli Gobbi 120289REV1 E-mail: [email protected] Tel: 34177 Disclaimer and Copyright: This briefing is a summary of published information and does not necessarily represent the views of the author or the European Parliament. The document is exclusively addressed to the Members and staff of the European Parliament for their parliamentary work. Links to information sources within this document may be inaccessible from locations outside the European Parliament network. © European Union, 2012. All rights reserved. http://www.library.ep.ec Library Briefing Greek debt restructuring French President Nicholas Sarkozy affirmed years of austerity measures, risking a social - that "the problem is solved" while European not only economic - collapse. Council President Herman Van Rompuy stated One-third of the population is below the that "a turning point has been reached". poverty line, the minimum wage has been cut Following the debt swap deal, Eurogroup Chief by 22% - to about €580 par month - and Jean-Claude Juncker confirmed on 9 March frustration and disappointment with the that the "necessary conditions were in place" political class is exploding. Data provided by for the second bailout to be adopted by ELSTAT and the OECD show that GDP fell by Eurozone Finance Ministers. The Eurozone 6.8% in 2011 and that the unemployment rate then formally approved the second bailout on is now at 19.9%, twice as high as three years 14 March, with a total of €109.1 billion. The first ago (in 2009 it was at 9.5%) - and is expected instalment of €39.4 billion will be distributed in to increase further. Living standards have also several tranches. The money will come from been reduced. GDP is expected to fall by 7.1% the European Financial Stability Facility and is in 2012 and 1.2% in 2013. to be used mainly for the financing needs of Reforms are expected to slow down already the Greek banking sector and government. The weak domestic demand, and the inflation rate aim of these funds is to recapitalise Greek reveals inflexibility in product and service banks, which have big holdings of government markets. Output and exports are set to shrink bonds. while the labour market will need a long The Head of the International Monetary Fund adjustment process. Christine Lagarde said on 9 March that the The primary deficit, before interest, is going debt swap deal was "an important step that down, so reducing the rate of growth of the will dramatically reduce Greece's medium-term national debt, but the recession is worsening. financing needs". An IMF board meeting on 15 Large numbers of companies nationwide are March allocated €28 billion to help Athens. In going bankrupt. The aim of the reforms is to 2010, the IMF contributed one-third of the boost the economy and achieve sustainable bailout, but this time it has contributed less as growth, but these measures will mainly it considers Greek debt not sustainable. produce benefits in the long term, while in the Three credit rating agencies, Moody's, Fitch short term, sacrifices will be required of Greek and Standard & Poor's, downgraded Greece to citizens. the "selective default" level. Fitch then raised However, the political dimension of the crisis the rating after completion of the swap, should not be underestimated. The upcoming reaffirming though that "significant default elections - not fixed yet, but most likely in April risk" remains. or May - will see the Greeks have their say on It appears that bankruptcy has been avoided the current changes and reforms. The right- for the moment, but concern over the Greek wing New Democracy (the second largest situation is not over. parliamentary party and coalition partner) Many commentators pointed out that the enjoys more support than the socialist PASOK second bailout is not big enough to avoid all (biggest party in the current government) in troubles and that EU leaders are only buying recent opinion polls. Nevertheless, since time before a third bailout is required. German neither party is likely to win a clear majority, Finance Minister Wolfgang Schäuble said that either would probably have to include one of "nobody can rule out that Greece will not need the extremist parties in their government, a third package, but now it is time to implement raising concerns over governance and, even the second package". The lack of external worse, viability of the reforms and bailouts. investment leads analysts to believe that a new Analysts predicted a coalition government injection of money will be necessary. made up of PASOK and New Democracy, but ND leader Antonis Samaras has ruled out that Possible scenarios possibility. With regard to the impact of the crisis on the population, Greeks will probably have to face Author: Francesco Pontiroli Gobbi 120289REV1 E-mail: [email protected] Tel: 34177 Page 2 of 2 .