'A New Epoch Has Begun in the History of the Euro'

Spiegel
July 22, 2011

The deal passed by euro-zone leaders is more than just a 109 billion euro aid package for Athens. It represents a radical change to the architecture of the common currency zone, say German commentators. And that might be enough to guarantee the euro's survival.

Prior to Thursday evening's euro-zone agreement on a second aid package for Greece, the demands for action had become deafening. Some were insisting that Athens was doomed if Europe didn't undertake a significant restructuring of the country's debt. Others said such a move would be disastrous, and would result in riots on the streets of the Greek capital.

In the end, euro-zone leaders gathered in Brussels opted to split the difference. Greece gets €109 billion in aid, allowing it to remain solvent through 2014 -- but private creditors are to have a significant role to play in helping Athens find its way out of the debt predicament in which it finds itself. By 2014, private involvement is to be worth fully €50 billion -- much higher than expected.

In addition, the European Financial Stability Facility (EFSF) will be granted the authority to buy bonds of debt-stricken euro-zone countries as a way of extending them a pre-emptive credit line. The move puts the EFSF on the path to becoming a kind of European Monetary Fund on the model of the Washington-based International Monetary Fund.

"It was a meeting at a difficult time and I am satisfied with the results," said German Chancellor Angela Merkel. "Developments have shown that we in Europe need to work together more closely and more flexibly."

Private sector involvement is to take the form of a debt swap, whereby private investors will be able to exchange their current Greek bonds for EFSF bonds during a brief time window this autumn. The move will likely be viewed by rating agencies as a selective default, making Greece the first euro-zone country to default.

Euro-zone leaders also lowered the interest rate Athens is required to pay on its rescue loans to 3.5 percent. "I think this is extremely important to ensure the debt sustainability of Greece," said European Commission President Jose Manuel Barroso.


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