Stability in Greece? EU Finance Ministers and the IMF Agree to Reduce Greece’s Debt

Posted on November 27th, 2012

EU Finance Ministers and the IMF Agree to Reduce Greece’s Debt.  Don’t Hold Your Breath Germany.

The International Monetary Fund and the EU Foreign Finance Ministers agreed today after weeks of failed attempts to reduce Greece’s foreign debt.  The package, achieved after twelve hours of negotiations overnight with international lenders will reduce Greece’s debt by 40 Billion Euros.  If projections are correct, Greek debt will be cut to 124% of GDP by 2020; foreign ministers also agreed to take additional steps to further reduce that number to 120%.  Without the agreement and the release of much needed financial aid, some economists forecasted that Greek debt would reach 190 to 200% of GDP within the next two years.  Those numbers would be unsustainable with the likelihood that Greece would be out of the EU.

The debt reduction package included a number of typically used financial tools, from a reduction of the interest rate on official loans, the extension of the maturity of Greece’s loans from the EFSF by 15 to 30 years and the granting of a 10 year interest payment deferral on the EFSF loans.  Talks surrounding the negotiations also alluded to an outright forgiveness of some of those loans in the future, but there was no public statement in that regard.

While the financial tools used in arriving at the package are typical, obtaining the support of northern Europe, particularly Germany was not.  German politicians are reluctant to go too far in supporting Greece right now as elections will take place next year and many German citizens continue to bristle at the impact that the bail out has on their pocketbook and economy.  Perhaps, to soften the reactions of German citizens, Germany insisted on earmarking revenue and aid payments into a strengthened “segregated account” to ensure that Greece actually services its debt.

All in all, should Greece be able to meet all of the conditions, the bail out will provide Greece with 43.7 Billion Euros in four installments.  The fund will release 34.4 Billion Euros in December allocating 23.8 Billion to banks and 10.6 Billion for Greece budget assistance.  The IMF will release its portion of the bail out, not quite one-third, after a repurchase of Greek debt has occurred over the next few weeks.

Following the announcement of the deal, the Euro gained strength, European stock shares increased to a three week high and German bonds, a safe haven for investors fell.

The deal still requires formal approval in EU, but passage is expected.  Votes are scheduled this week.