Greece: Eurozone finance ministers and IMF reach agreement on Greece
November 27, 2012
On 27 November, Eurozone finance ministers and the International Monetary Fund reached a broad agreement on changes to the Greek bailout package and unlock the payment of funds frozen since July. Changes had become necessary, as the originally envisioned Greek debt trajectory had veered off track, given dismal developments of the Greek economy and the delayed implementation of key reform measures. Eurozone finance ministers and the IMF approved the disbursement of a total amount of EUR 43.7 billion. However, while agreement was reached, the IMF will not disburse its part of the bailout until "progress has been made on specifying and delivering on the commitments". Differences between the IMF and the Eurogroup revolved around the deadline for bringing Greek debt down to 120% of GDP by 2020, as was stipulated in the original bailout package. Whereas the IMF demanded to stick to the original plan and to reduce Greece's debt to that level by 2020, the Eurogroup advocated a delay until 2022, as keeping the initial deadline would have required Euro area governments to make considerable write-downs on their bailout loans. The compromise reached foresees lowering Greek debt to 124% of GDP by 2020. In exchange for accepting the higher debt ceiling, the IMF received the Eurogroup's commitment to further reduce Greek debt to "substantially lower than" 110% of GDP by 2022. Without the adjustment measures Greek debt would reach an estimated 144% of GDP by 2020. In order to reach this goal, Greece will be granted a reduction on the interest rate it pays on official loans. In addition, maturities of official loans will be extended by 15 years and the repayment of interests will be deferred by 10 years. Finally, Euro area member states commit to hand back to Greece the profits that national central banks accrue on European Central Bank holdings of Greek debt. According to the new deal, Greece is expected to achieve a primary surplus of 4.5% of GDP by 2016, thus formalizing the two-year extension of the initial deadline suggested by European finance ministers in an earlier meeting on 20 November. In order to guarantee timely debt repayment, Greek authorities are asked to transfer to an escrow account all the targeted primary surplus as well as 30% of the eventual excess primary surpluses, in addition to revenues from the ongoing privatization of state-owned assets. In addition, Greece will organize a buy-back on debt held by private investors, which is expected to take place on 12 December. The prices were not specified but "are expected to be no higher than those at the close on Friday, 23 November 2012", according to the final statement released by the Eurogroup. A review of the buy-back operation will be crucial in order to formalize the disbursement of the bailout funds by 13 December.