July 21, 2011
“We have shown we are up to the challenge. We are capable of acting.” Such were the bullish words of Angela Merkel tonight, after a nine-hour summit of euro zone leaders agreed a new €109 billion bail-out for Greece, and approved the creation of new tools to fight market contagion around the euro zone (the communique is here).
Much of the attention in recent months has focused on the “involvement” of private creditors—nobody wants to talk of debt “restructuring”—and whether it would be construed as a selective default by credit-rating agencies.
But the most certain and immediate restructuring is not of the loans by the private sector, but of those by official lenders from the euro area. The interest on the euro-zone’s portion of the future Greek bailout is being reduced from about 5.5% to about 3.5%. Greece, then, is being allowed to borrow money as cheaply as an AAA-rate country. Moreover, the maturity on current and future loans would be extended from 7.5 years to a minimum of 15, perhaps even 30 years. Were such terms applied to private lenders, credit-rating agencies would have no doubt about calling it, at the very least, a selective default.
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