Wednesday, November 28, 2012

Greek Debt Plan Relies on Rosy Outlook

Wall Street Journal
November 27, 2012

A long-awaited deal cobbled together by euro-zone finance ministers early Tuesday gives Greece a rough outline for cutting its mountain of debt, but the plan threatens to be derailed if the country's economy doesn't emerge from recession in two years.

The currency bloc's governments would then almost certainly need to accept losses on their loans to Greece in order to meet the long-range debt targets that Greece's creditors set Tuesday, testing the political commitment of euro-zone leaders to keep Greece in the single currency area. With no end in sight to the Greek recession, that test could come within months.

"The latest Greek rescue deal will buy the country a bit more time," said Jonathan Loynes, chief economist at Capital Economics in London. "But unless the economy stages a miraculous recovery, the rest of the euro-zone will soon be forced to make much more difficult decisions over just how far it is prepared to go to keep Greece inside the euro."

The plan unveiled early Tuesday calls for the euro zone to cut the interest rate it charges Greece on bailout loans and for the European Central Bank to send Athens any profits the ECB makes on the Greek bonds it holds. The plan would also allow Greece to buy back its bonds at the sharp discount to face value at which they currently trade.


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