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Greece finally came to an agreement with international lenders to secure its second bailout early Tuesday after 13 hours of talks. In exchange for 130 billion euros ($172 billion) to stave off default, Greece has accepted severe austerity measures and strict conditions, and came to an agreement with private investors in Greek debt to accept even steeper losses than expected.
Though a deal had long been expected, the European Central Bank and the International Monetary Fund wrestled through the night over a discrepancy in the amount of Greece’s debt to be reduce, finally agreeing that Greece would reduce its debt to about 120.5 percent of gross domestic product by 2020, from about 160 percent now.
Holders of Greek debt, who agreed in October to accept a 50 percent writedown on the face value of their bonds, ultimately agreed to take a 53.5 percent loss, the equivalent of an overall loss of around 75 percent. Meanwhile, Greece will pay lower interest rates on its bailout loans, and the ECB will give up profits from Greek bonds bought at a discount so as to pass those gains back to the government in Athens, though indirectly through euro-zone member countries because of ECB regulations.
Yet doubts persist about Greece’s ability to carry out the tough austerity measures pushed through Parliament to secure new bailout funds. A leaked report from the European Commission, ECB, and IMF said that if changes were not made, Greek debt could remain at 160 percent of GDP in 2020, and also suggested that more help would be needed after the period covered by the new bailout, potentially amounting to $66 billion more from 2015 to 2020.
A permanent European team will be installed to monitor Greece’s implementation of the austerity measures, and money paid to the government in Athens will be directed into a special “segregated” account that will prioritize debt repayment. The 50-page agreement also lays out that Greece will make big spending cuts, including reducing pharmaceutical expenditures by more than $1.3 billion in 2012, cut overtime pay for hospital doctors by at least $66 million, save $396 million in military procurement, and save nearly $40 billion by reducing the number of deputy mayors and their staffs. Significant changes will also be made to Greece’s notoriously weak tax collection system.
Greek Prime Minister Lucas Papademos described the agreement as a “historic decision” in a press conference in Brussels on Tuesday morning, noting that it would allow the country to “move forward with stability, to reduce uncertainty and boost trust in the Greek economy in order to create better conditions.”
“The new program has characteristics that will contribute to improving competitiveness and to creating conditions that will boost growth at a steady rate,” he said, stressing that measures pledged by Greece absolutely must be implemented. “We don’t have the luxury of delaying implementation. If we fail to do this, then once again we will face financial deadlock in the future and that is not permissible.”
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