The euro zone attempted to draw a line under Greece’s mounting debt problems yesterday (21 July) as banks holding the country's government bonds agreed to contribute €37billion in a fresh rescue totalling €109 billion until 2014.
In many months of haggling with the EU's banks, the private sector has agreed to take a hit to its holdings of Greek sovereign debt and voluntarily contribute to a second bailout after the heads of Europe's biggest banks met with the leaders of the euro zone yesterday.
In a political first, Deutsche Bank's Josef Ackermann and BNP Paribas' Baudouin Prot met with the euro zone's elite to get a one-off agreement on bondholder haircuts, which will include debt swaps, buybacks and extensions of repayment times known as maturities.
Ackermann, who heads the Institute of International Finance, laid out several options banks could live with as their share of reducing Greece's €350 billion debt heap.
In what felt more like a maths lesson than a press conference, German Chancellor Angela Merkel outlined a €37 billion private sector contribution between 2011 and 2014. In addition, a Greek debt repurchasing or buyback, which would raise €12.6 billion, brings investors' total contribution to around €50 billion, the chancellor explained.
Between 2011 and 2019, the private sector's total contribution to a Greek rescue could amount to €106 billion, according to conclusions from last night's talks.
Bankers and eurozone leaders agreed that Greece would repurchase its debt on the secondary market and banks with Greek debt on their books would be forced to accept a discount in the face value of their holdings.
Germany and Finland get their way
The conclusions also mentioned that the new package would include collateral, a victory for the Finnish government which had insisted that guarantees should be backed up by safer securities.
A Finnish diplomat explained that Finland had backed up guarantees with assets like public buildings during the country's banking crisis in the nineties.
The terms of last night's agreement were a sea change from previous draft plans where buybacks had been firmly thrown out of the window by the German government.
Diplomats yesterday indicated that Germany conceded on buybacks in exchange for France dropping its brainchild of a one-off bank levy to supplement the EU's €440 billion rescue fund, the European Financial Stability Facility (EFSF).
The buyback will be financed by the EFSF. Greece will be expected to repurchase its debts from the private sector at a discounted rate.
Leaders also decided yesterday to extend the repayment schedule of EFSF loans from 7.5 years to a minimum of 15 years and to lower the loan's interest rate to 3.5% from 4.5%.
The agreement to involve private-sector banks is a clear political victory for Merkel, but it might not shelter Greece from default. In a departure from previously cloaked statements, several heads of state said Greece could still face a partial default under the agreed plan, words that have been spurned for fear of further debt downgrades in the euro zone.
Default or not default?
"I will not prejudge a selective default," the European Central Bank's chief, Jean-Claude Trichet, said at a press conference last night.
Leaders also agreed to extend the powers of the EFSF to stem a tide of further bailouts spreading to countries with the highest debt burdens – Ireland, Portugal, Spain, Italy and Belgium.
The EFSF will now be able to provide support to countries which are not yet recipients of a bailout. The facility will be able to provide loans as a precaution, intervene on bond markets and even recapitalise banks.
The proposed expansion of the EFSF's role could fall foul of critics in Germany, the Netherlands and Finland, countries which have previously feared that a bigger facility would turn taxpayers against them.
Ireland finally also secured a lower interest rate of 3.5%, down from 5.8%, on its €85 billion bailout package. Leaders have held out on the rate reduction as Ireland's low corporate tax became a political hot potato for countries like France.
Though conclusions from last night's talks allude to an upcoming dialogue on Ireland's corporate tax, the country's leader, Enda Kenny, has been adamant that Ireland's 12.5% tax rate is not negotiable.
EU economic government in the making
French President Nicolas Sarkozy, who agreed to shelve his idea for a €50 billion tax on eurozone banks, said the deal had pulled the euro zone back from the brink of disaster and laid foundations for the creation of an EU "economic government".
"By the end of the summer, Angela Merkel and I will be making joint proposals on economic government in the euro zone. Our ambition is to seize the Greek crisis to make a quantum leap in eurozone government," he said, calling for "bold and ambitious" plans to create an embryonic EU treasury in the form of a European Monetary Fund.
"The very words were once taboo. We will give a clearer vision of the way we see the euro zone evolving. We have done something historic. There is no European Monetary Fund yet, but nearly."
Edited by Daniela Vincenti-Mitchener