Greece: Greece secures its second multi-billion bailout
March 2, 2012
On 21 February, Eurozone finance ministers approved the new EUR 130 billion (USD 172 billion) rescue package to shore up Greece against the risk of bankruptcy. Prior to the approval, Greece had reached a deal with private investors to accept a voluntary bond exchange with nominal losses of 53.5% on the debt, which is above the 50% haircut agreed in October 2011. Greece will also pay lower interest rates, with the debt coupon at 2% until 2015 and 3% over the following five years, before finally rising to 4.3%. According to the terms of the agreement which seeks to reduce public debt from its current 160% to 120.5% of GDP by 2020 the European Commission will station a permanent team in Greece to monitor the plan's implementation. In addition, a part of state revenue will be directed into a segregated account, which will be used to fund debt repayment. The Greek government also committed itself to implementing yet another set of austerity measures. Accordingly, on 28 February, the parliament approved further budget cuts, totalling around EUR 3.2 billion and including, among other measures, pension cuts, a reduction in the minimum wage, a public sector wage freeze and defence budget cuts. On 2 March, owing to the deteriorating situation of the Greek economy, international rating agency Moody's downgraded Greece's long-term credit rating to C (default) from CC, following Standard & Poor's reduction from CC to selective default (SD) on 27 February. The downgrades raised concerns that pay-out on Greek credit-default swaps (CDS) could be triggered. Against this backdrop, on 1 March, the International Swaps and Derivatives association stated that a restructuring credit event has not occurred yet and that pay-out on Greek CDS will not be activated. However, the committee noted that the situation in Greece is still evolving and that new developments may well trigger CDS pay-outs at a later date.