Counteroffensive

Economist
July 21, 2011

After months of dithering, through which market confidence in a struggling periphery steadily eroded, eventually dragging the economies of Spain and Italy into the gyre, the euro zone has at last prepared its response. While it may not prove sufficient to the task, it is more than many hoped for or expected to get. An emergency Brussels summit has concluded with agreement on a new rescue package for Greece, worth an estimated €109 billion, and a new set of weapons in the battle to limit contagion.

As expected, private creditors of the Greek government will take a hit, contributing €37 billion of the package's total. Bondholders will be given four restructuring options to choose from, a menu that includes a selection of durations and coupon payments. The hit to private lenders will most likely lead to a "selective default" rating from ratings agencies, but the European Central Bank has acquiesced to this outcome. ECB President Jean-Claude Trichet suggested that European governments would likely guarantee Greek bonds in the event of a default rating.

The bail-out programmes for Greece, Ireland, and Portugal would all be amended as a result of the agreement. The interest rates on emergency loans would fall to 3.5% (a drop of 1 to 2 percentage points) and repayment schedules will be lengthened considerably. There was also agreement on a Greek bond buyback programme worth €12.6 billion.

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