Europe Agrees on New Bailout to Help Greece Avoid Default
By STEPHEN CASTLE
Last Updated: 11:42 PM ET
BRUSSELS — Greece finally secured its second giant bailout early Tuesday after euro zone finance ministers agreed to save it from bankruptcy in exchange for severe austerity measures and subject to strict conditions.
After more than 12 hours of talks, the ministers approved a new bailout of 130 billion euros, or $172 billion, under which private investors in Greek debt will take steep losses to help stave off the country’s imminent default.
“We have reached a far-reaching agreement on Greece’s new program and private-sector involvement,” Jean-Claude Juncker, the prime minister of Luxembourg, announced Tuesday morning.
The agreement could be a new turning point in the European debt crisis, which has raised questions about the viability of the euro itself.
Though the outcome had been expected, the meeting in Brussels proved more grueling than expected as euro zone countries, the European Central Bank and the International Monetary Fund wrestled through the night over a discrepancy in the amount of Greece’s debt to be reduced.
Under the bailout terms, which were not finalized until after 5 a.m. Tuesday, Greece is supposed to reduce its debt to 120 percent of its gross domestic product by 2020, from about 160 percent now. But the steady deterioration of public finances in Athens has left the country’s creditors with problems in making the figures for the new bailout add up. As unemployment has continued to rise and taxes and other revenues have declined, the latest estimates suggest that figure would be closer to 129 percent.
Representatives of private-sector banks that hold Greek bonds were resisting pressure to accept further losses. Other ways of making the numbers add up were to be considered only when the negotiations with the private creditors were close to completion, said one euro zone official who was not authorized to speak publicly. Alternatives include contributions from the European Central Bank to the reduction of Greek debt, or other measures like reducing the interest rate Greece pays for the bailout loans.
Stricter rules on euro zone debt and budget deficits are already in place, and next week European leaders are expected to agree on a new, higher firewall for euro bloc countries that get into financial trouble, a step that policy makers hope will signal the beginning of the end of the crisis.
The talks on Monday were believed to have addressed the firewall issue. A new, permanent fund of 500 billion euros, or $660 billion, called the European Stability Mechanism, is due to come into existence in July, and one way of bolstering its power would be to run it alongside the current, temporary, rescue fund, the European Financial Stability Facility.
The bailout, with a stronger firewall, could provide the euro zone with some much-needed momentum. The injection of liquidity into the banking sector by the European Central Bank late last year — with the tacit support of Germany — had started to convince critics that there was a determination to save the currency.
Yet only last week the Greek bailout appeared to hang in the balance when rumors circulated that Germany’s finance minister, Wolfgang Schäuble, was willing to contemplate a Greek default. As tempers flared, the Greek finance minister, Evangelos Venizelos, suggested that some people were trying to drive his country out of the euro zone, and the Greek president, Karolos Papoulias, accused Mr. Schäuble of insulting the country.
It remains unclear whether a default was contemplated seriously or merely floated as a means of pressuring Athens.
Nevertheless, the episode underlines the extent to which Greece remains a weak spot for the 17 European Union countries that use the euro. This would be the second major bailout for Greece in two years. In May 2010, European governments and the International Monetary Fund put together the first three-year bailout package of 110 billion euros, then worth about $146 billion, not all of which has been used.
Doubts persist about Greece’s ability to carry out the tough austerity measures pushed through Parliament or to manage the weakened economy.
Those long-term fears deepened with the leak of an official report that said that if changes were not made, Greek debt could remain at 160 percent of G.D.P. in 2020. It also suggested that more help would be needed after the period covered by the bailout being negotiated. That could amount to $66 billion more from 2015 to 2020, Reuters reported.
As part of its rescue, Greece was also encouraged to accept outside help to improve its administration and, in particular, its tax collection system. The Dutch finance minister, Jan Kees de Jager, said Monday that he supported a permanent presence of the so-called troika — the European Commission, European Central Bank and International Monetary Fund — in Athens to monitor fulfillment of the austerity measures. Late Monday the issue of the special account and extra surveillance of Greece’s reform program were agreed on, said Greek officials speaking on the condition of anonymity as talks continued.
Another issue to be resolved was how much the I.M.F. would contribute to the new rescue, with the figure expected to be less than a third of the bailouts for Ireland and Portugal.
“There are many structural reforms under way,” François Baroin, the French finance minister, said on Europe 1 radio before the meeting. “We can’t wait because of the payment that is due in March,” he added, referring to a $19 billion repayment of Greek debt due on March 20.
According to a draft agreement for the bailout, Greece will make big spending cuts, including reducing pharmaceutical expenditures by more than $1.3 billion in 2012 through increased use of generic medicine, cutting overtime pay for hospital doctors by at least $66 million, saving $396 million in military procurement and saving nearly $40 million by reducing the number of deputy mayors and their staffs.
The 50-page draft agreement also lays out in detail the changes to be made to Greece’s notoriously weak tax collection system.
The second bailout was first promised in October, but agreement has been delayed as international creditors have pressed for more concessions and stricter controls on Greece’s government.
Critics, who suspected that Greece was banking on the euro zone’s desire to avert a default, accused the government of stalling on essential economic measures.
Meanwhile, the government in Athens, led by Prime Minister Lucas D. Papademos, has had to cope with mounting opposition to austerity measures. Mr. Papademos, who attended Monday’s meeting, told ministers that there was enough political backing in Greece to allow the fulfillment of new austerity measures accompanying a second loan deal, an official in his office said.
Mr. Papademos noted that the measures had been voted into law by two-thirds of the country’s Parliament and that the government’s two coalition parties had backed the changes. He added that the majority of Greeks wanted the country to remain in the euro zone.
Even politicians from the triple-A rated countries in Europe seemed ready on Monday to give Greek politicians some credit. In Helsinki, the Finnish finance minister, Jutta Urpilainen, said that Greece had done what had been asked of it, Reuters reported.
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