Greece economy crisis: Europe agrees to second £110bn bailout

| February 21, 2012 | 0 Comments

  • Deal comes after more than 12 hours of talks in Brussels
  • Several countries remain sceptical over whether Greece can deliver cuts
  • Some leaders demanded ‘permanent’ control of Greece’s budget
  • Said it was needed to tackle its huge debts

Jason Groves

Last updated at 7:53 AM on 21st February 2012

Eurozone governments have come to the rescue of Greece by approving a second £110billion bailout to prevent the collapse of its stricken economy – after months of wrangling and a last round of more than 12 hours of talks in Brussels.

Haggling over figures, financial targets and Greek government belt-tightening pledges went on through the night in a last-ditch attempt to rally markets and put crisis-hit Athens back on the path to economic recovery.

European leaders had demanded ‘permanent’ control of Greece’s budget as they edged closer to the second deal.

Greece's Prime Minister Lucas Papademos, Germany's Finance Minister Wolfgang Schaeuble and Dutch Finance Minister Jan Kees de Jager talk together at the European Union council headquarters in Brussels

Greece’s Prime Minister Lucas Papademos, Germany’s Finance Minister Wolfgang Schaeuble and Dutch Finance Minister Jan Kees de Jager talk together at the European Union council headquarters in Brussels

However several countries remained
sceptical about whether Greece was willing and able to deliver the
budget cuts needed to bring its vast debts under control.

The depth of concern was highlighted
by Dutch finance minister Jan Kees de Jager’s call for international
monitors to take up a ‘permanent’ position in Athens to oversee reforms.

de Jager said the European Commission, European Central Bank and
International Monetary Fund should all be given greater control over
Greece’s budget as the price for any bailout deal.

added: ‘We will see to a rigid and very strict implementation of those
demands and only then will we make the next step. I am in favour of more
control, more supervision – money is the thing we can control Greece

Unrest: Two immigrant men push a shopping trolley through the streets of Athens' Omonia district

Unrest: Two immigrant men push a shopping trolley through the streets of Athens’ Omonia district

Riot policemen are attacked with flares during clashes in front of the Greek parliament over the weekend

Riot policemen are attacked with flares during clashes in front of the Greek parliament over the weekend


Q: What are the main points of the deal?

A: Banks, hedge funds, pension funds and other private investors who own around 200billion euro in Greek government bonds have been asked to forgive Greece 53.5 per cent of the face value of those bonds. That could immediately cut Greece’s 350billion euro debt pile by 107billion euro. Interest rates on the remaining debt will be an average 3.65 per cent compared to around 4.8 per cent previously. Greece will also have 30 years to repay those bonds, up from just under seven years. Overall savings will depend on how many investors agree to participate.

Q: Why is this agreement so important?

A: It is one of two critical steps – the other being deep cuts in government spending – required before Greece could receive a 130billion euro bailout from other countries in Europe and around the globe. Without this bailout, its second in two years, and the debt relief Greece would default on a 14.5billion euro bond payment on March 20.

Q: And if Greece were to miss this bond payment, then what?

A: A Greek default would potentially spread the crisis to other eurozone countries, by making investors even more leery of lending to them. And analysts fear it could set off a chain reaction similar to the financial meltdown that occurred in the fall of 2008 and triggered the Great Recession.

Q: Why did private investors agree to a voluntary loss?

A: Without the deal, they risked getting nothing. And many of the same investors also hold debt from other eurozone countries, which would likely lose value in the event of a default.

Q: Might some investors refuse to go along?

A: Yes. However, Greece will soon put new legal clauses into its bonds that would force holdouts to participate.

Q: Aside from the private investors, who else owns Greek debt?

A: Another 50-55billion euro of Greek government bonds is held by the European Central Bank and other central banks. These are exempt from the writedown, but the central banks will forego profits on those holdings. All told, Greece’s debt has reached roughly 350billion euro, or more than 160 per cent of annual economic output.

Q: Aren’t cuts in government spending and other austerity measures helping?

A: Greece’s government ran a deficit of 10.6 per cent of gross domestic product in 2011. It has promised the EU and International Monetary Fund that it will achieve a so-called primary surplus – a budget surplus when not counting interest payments on loans – in 2012. That promise hinges on the debt relief from private investors and a harsh austerity program of higher taxes and deep cuts in public spending and wages for at least until 2020.

Q. When was the last time a country defaulted on its debt?

A. The last major country to default on its debt was Argentina in 2002. The country finally managed to negotiate a settlement on its defaulted bonds in 2005.

The imposition of permanent monitors
in Athens is likely to fuel resentment in Greece, where feelings are
already running high because of the tough austerity package demanded by
Germany and other northern European countries.

proposed rescue plan would write off £85billion of Greek debt, with
private lenders accepting a 70 per cent cut in what they are owed.

diplomats and economists say it may only delay a deeper default by a
few months. Some experts believe the scale of the austerity measures
threatens to send the Greek economy into freefall. In the final three
months of last year, the economy shrank by 7 per cent.

While European shares and the euro
have been buoyed by hopes of a deal, the prospect of further cuts
sparked riots involving thousands of protesters in Athens at the

Eurozone leaders
arriving in Brussels yesterday voiced cautious optimism that a deal was
close. Jean-Claude Juncker, prime minister of Luxembourg and chairman of
the eurozone finance ministers group, said: ‘We have to deliver,
because we don’t have any more time.’

unelected prime minister, Lucas Papademos, flew to Brussels to join the
talks as about 3,000 demonstrators massed in Syntagma square in Athens
and riot police shielded the national assembly from the threat of

The deal is based on long-range
forecasts of Greek’s best-case-scenario debt reduction chances over the
next eight years, with some pundits instantly dismissing the deal as

In return for the latest 130bn euro
(£110bn) bail-out and a private creditor debt write-off worth about
another 100bn euros (£84bn), the Greek government is pledged to
implement fully a severe austerity package of pay, pension and jobs
cuts, as well as finding savings of 325m euros (£270m) in this year’s
national budget.

The deal nearly came unstuck over a
requirement on Athens to get the Greek projected debt level down to
around 120 per cent of national wealth by 2020.

Extra hours of financial juggling
brought eurozone negotiators close – at least on paper – by massaging
the figures to deliver a theoretical 121 per cent GDP level by 2020.

Greece had only offered 129 per cent,
which was rejected as inadequate, although nothing like as bad as the
current unsustainable 160 per cent of GDP Greece is grappling with.

Pundits predicted short-term rallying
of markets followed by a fall-back when the continuing massive scale of
the debt mountain Greece has to climb becomes clear.

The Greek economy received a 110bn
euro (£91bn) bail out from the EU and IMF in 2010 but it was not enough
to lift Greece out of crisis.

Ahead of the overnight talks some
critics were warning against ‘throwing good money after bad’.

But the
price of letting Greece default and be forced out of the euro currency
was seen as a worse option.

Instead the talks concentrated on
tying Greece as tightly as possible to austerity measures which will
chip away at its debt and deficit levels.

Political parties on all sides were even pressed to promise no easing of the austerity package in forthcoming Greek elections.

Demonstators gather in front of Parliament during a protest against austerity measures Athens, Greece

Demonstators gather in front of Parliament during a protest against austerity measures Athens, Greece

A riot policeman sprays tear gas at protesters in front of the Greek parliament during a demostration against new austerity measures

A riot policeman sprays tear gas at protesters in front of the Greek parliament during a demostration against new austerity measures

Here’s what other readers have said. Why not add your thoughts,
or debate this issue live on our message boards.

The comments below have not been moderated.

The current bailouts only support the failed french/german-banks/eu/euro, and delay the rebuilding process greece inevitably needs to do to stand on its own feet. Greece needs to decouple from the eu, default on its debt, and devalue its currency. Costs need to be reduced and exports increased until growth is attained. Business and industry need to develop even if this means starting from scratch with international aid, investment and support (eg mini-marshall plan). With a lower currency tourism and exports become more competative and imports are reduced. This allows local industry to increase and develop. The sooner greece starts this process the sooner it will attain growth. Better to start the process now than to wait and start from a weaker position later; after suffering from eu imposed austerity measures.

“Money is the thing we can control Greece with” – does that statement send shivers down anyone else’s spine ?
– Graham, Hong Kong, 21/2/2012 4:31
I was going to say exactly the same thing – and to hear it from a Dutchman, too. He should go and have a words with his parents or grandparents – I think they’d have a thing or two to tell him about ‘controlling’ other countries.

The job is done. Greece will be unable to deliver and the problem will rear its ugly head once more a few years down the line. Italy, Portugal, Ireland, Spain .. and most hopefully France will follow. If I was a ‘private lender’, then I would most definitely not accept a writedown of 70% of the debt, anymore than a bank would if a private individual got into difficulties. The root cause of the whole problem is the Euro and absolutely nothing has been fixed.

the Euro was an experiment which does not work……its time countries went back to their original currency …..and better still to disband euroland altogether.

Like giving whisky to a drunk.

Another episode of this long-running soap: an everyday story of Eurofolk!

Another £110bn just to keep Greece’s life support machine running (with absolutely no real hope of a recovery) just so that the Eurozone can boast that they have retained a ‘member’ (however sick they are). ‘WE’ in the UK HAVE been part of this bailout (indirectly via IMF) and what hope have we REALLY got when, typically, we’ll only see a 30% return ? One thing for sure is that the money will disaapear into the ether supporting Greece’s unsustainable lifestyles and practices (such as little or no taxation, early state retirements etc etc). I want out of this association before we get too near the whirlpool sucking this country into TOTAL membership.

Well all credit to Greece. They held on long enough to get their Golden Handshake.
Now, inevitably they will default. The only thing that would keep them in the EU is the promise of yet ANOTHER bail out.
Greece used to be the cradle of civilisation, perhaps where they go, others will follow. We are witnessing the breakup of the EUSSR and not before time.

Unelected people sending them don the river, utterly amazing. Democracy eh

They’re a bigger liability than Scotland!

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