Wednesday, November 28, 2012

Euro Zone Makes Good on Greek Promise

by Richard Barley

Wall Street Journal

November 27, 2012

At last, the euro zone has found a Greek formula that should allow it to disburse €43.7 billion ($56.69 billion) to the beleaguered nation. It shouldn't have taken this long, and this doesn't mark the end of the Greek debt drama. National parliaments will need to agree to the deal and Greece will have to live up to its promises. But the important thing is that the euro zone has made good on its commitment to support Greece, and in doing so has sanctioned at least limited official-sector debt relief.

Of course, the measures agreed on aren't the definitive write-off that would clearly make Greece's debt sustainable. But they are significant, including an extension of 15 years on the maturity of loans to Greece, a one-percentage-point cut on bilateral loan rates and a 10-year deferral of interest payments to the European Financial Stability Facility. The latter alone represents a saving of a hefty €44 billion over that period. All these measures are more politically and legally palatable than a cut in the face value of the debt.

Some details remain outstanding, in particular plans to buy back Greek bonds at a deep discount. At current prices, €10 billion of purchases would retire roughly €30 billion of bonds, almost half the outstanding amount. But while Greek domestic investors, who Barclays estimate hold €20 billion of bonds, are likely to participate, foreign holders might hold out in the hope that continued euro-zone support might lead to further gains. Nor is it clear how a buyback will be financed. Greek bond prices rose Tuesday even though buyback prices should be capped at Friday's closing levels.


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