Debt-stricken Greece won a second bailout after European governments wrung concessions from private investors and tapped into European Central Bank profits to shield the euro area from a precedent-setting default.
Finance ministers awarded 130 billion euros ($173 billion) in aid, engineered the central bank profits transfer and coaxed investor representatives into providing more debt relief in an exchange offer meant to tide Greece past a bond redemption next month.
Bondholders’ response to the swap, Greece’s tolerance of more austerity and a gantlet of parliamentary approvals in northern European countries gripped by an anti-bailout mindset loom as risks to the latest salvage operation.
“Everybody understood that this was the moment of truth,” Belgian Finance Minister Steven Vanackere told reporters early today after 13 1/2 hours of talks in Brussels.
The assistance brings to at least 386 billion euros the sums spent or committed to save Greece, Ireland and Portugal from bankruptcy, and to insulate Europe from a ruinous financial cascade that might endanger the 13-year-old monetary union.
Euro leaders point to declining bond yields in Italy and Spain as evidence that investors are less fearful that the turmoil originating in Greece, representing 2.4 percent of the continental economy, will spill across borders.
The accord lifted the 17-nation euro. It rose as high as $1.3293 at 5:30 a.m. Brussels time from an intraday peak of $1.3277 yesterday.
Greece upheld part of its side of the bargain by spelling out 325 million euros in additional spending cuts, the latest of the unpopular measures that have provoked street protests in Athens.
Still, the odds that Greece will remain encumbered by debt were illustrated by an analysis by European and International Monetary Fund experts that highlighted what could go wrong with a country unable to grow out of its fiscal woes by devaluing its currency.
“Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it,” the analysis said. In a worst-case scenario Greece’s debt might balloon to 160 percent of gross domestic product in 2020, it concluded.
Finance chiefs’ starting point yesterday was the baseline European-IMF estimate, which put Greek debt at 129 percent of GDP in 2020. By lowering Greece’s bailout loan rates and extracting more from private investors and the central banks, they whittled that figure to 120.5 percent, a level deemed “sustainable” by the IMF.
Greek Prime Minister Lucas Papademos traveled to Brussels to lead the bargaining with the bondholders, represented by Charles Dallara and Jean Lemierre of the Institute of International Finance.
That give-and-take harked back to an earlier nocturnal episode in the crisis, when Dallara in October bowed to pressure from leaders including German Chancellor Angela Merkel to consent to a 50 percent cut in the face value of Greek bondholdings.
Bank representatives leave Brussels today with that writeoff up to 53.5 percent.
Since Greece’s fiscal woes erupted in late 2009, creditor countries and the government in Athens have sought leverage over each other. Rich countries led by Germany tied aid to ever- stricter conditions, while Greece counted on Europe’s fear that a default would destabilize the euro.
Profits from the ECB’s crisis-driven purchases of Greek bonds at discounted prices will be channeled back to national governments and on into the Greek package. National central banks’ future profits from holding Greek bonds in their investment portfolios also will be funneled into the program.
ECB President Mario Draghi hailed the “very good agreement,” while declining to comment on the use of the central bank’s profits.
“We welcome the commitment of the Greek government to undertake the actions to restore growth and stability,” Draghi said. “We also welcome the commitment of euro member countries to keep on helping Greece to come back on the path of growth and job creation.”
Frustrated with Greece’s inability to meet two years of targets for cutting the deficit and selling off state assets, donor countries also insisted on more control over how Greece spends the money. A special account will be set up that gives priority to keeping Greece solvent before releasing money for the country’s budget.