22.7.2011
By Simon Miller
Private lenders are expected to take a €50bn (£44bn) hit over the next three years as Greece looks set to be the first Eurozone default.
Following a €109bn rescue deal agreed yesterday by Eurozone members, private lenders will provide €49.6bn over the next three years and includes a €12.6bn debt buy-back programme.
The Institute of International Finance expects 90% of private debt holders will participate and will see a total contribution of €135bn by the end-2020.
Last night the Institute set out the options available to lenders. Investors will be offered four new instruments in addition to the opportunity to participate in a debt buyback program to be established by the Greek government in consultation with the official sector. The four instruments involve:
– A Par Bond Exchange into a 30 year instrument
– A Par Bond offer involving rolling-over maturing Greek government bonds into 30 year instruments
– A Discount Bond Exchange into a 30 year instrument
– A Discount Bond Exchange into a 15 year instrument
The debt swaps will be offered by the European Financial Stability Facility (EFSF) and resemble the "Brady bond" debt exchanges provided to insolvent governments in Latin America, Eastern Europe and Africa since the 1980s.
All the options offer much lower interest rates than the current cost of Greek borrowing and two of the options also involve haircuts.
Chairman of the Board of the Institute Dr Josef Ackermann, stated, “We believe that taken together with the intention of the EU to improve the terms of its financial assistance to Greece, the recently strengthened economic reform program of the Greek government and the additional support of the IMF, this offer can contribute substantially to improving the competitiveness of the Greek economy.”
The debt deal will inevitably be judged by rating agencies as a default for Greece – a move that were demanded by Germany but until yesterday’s agreement was resisted by France and the European Central Bank – but leaders accepted that a “controlled” default was now needed.
The full agreement aims to be a Marshall Plan for Europe, with Eu development funds and loans from the European Investment Bank being used to finance Greek infrastructure and development plans. In addition, the agreement gives greater powers of intervention and fund raising to the EFSF and paves the way for even greater integration in the Eurozone.
Herman Van Rompuy, president of the European Council, said: "I am glad to announce that we found a common response to the crisis situation. We improved Greek debt sustainability, we took measures to stop the risk of contagion and finally we committed to improve the eurozone's crisis management."
*The Institute of International Finance's financing offer
*The full Eurozone statement
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