Greece set to partially default on bond repayments
European leaders have met in Brussels today to try and reach agreement on how to bail-out Greece for the second time.
Latest reports suggest agreement has been reached that will see private Greek bond holders pay for some of the rescue package but a proposed bank tax has been shelved.
This represents a political victory for German Chancellor Angela Merkel. However, it looks increasingly likely that there will be a default on bond repayments for the first time in the eurozone.
This goes against the line that the President of the European Central Bank (ECB) had been lobbying for. Jean-Claude Trichet had argued against allowing a selective default but relented on the understanding that this measure would just be limited to Greece.
Although the UK is not part of the European single currency, The UK does have close commercial links with 40 per cent of our exports going to Europe. UK politicians are extremely concerned about the situation with Chancellor George Osborne saying on Tuesday: “I’m very worried and this government is very worried.”
UK banks are interconnected with European banks and if a crisis spreads it could lead to a Lehman Brothers style collapse of banks that could affect the UK.
Full details of how the bondholder programme will work is still being negotiated this evening but it seems likely that funds from the European Financial Stability Facility (EFSF)would be used to buy back Greek bonds on the open market at a loss. This would only be done with the agreement of the ECB.
A bond-swap programme could be introduced that would allow holders of Greek debt that matures within the next eight years to trade in their bonds in exchange for bonds that pay out over a longer period. It is anticipated that certain sweeteners will be included in the arrangements to encourage this but details are not yet confirmed.
Agreement has been reached to lower interest rates on rescue loans to each of Greece, Ireland and Portugal, the countries that have been bailed out. This opens up the possibility that this policy could be followed should it be needed in the future for other countries that could become affected such as Spain and Italy.
European leaders agreed in principle to lower the rate by between 100-200 basis points than their current levels, around 3.5 per cent. Agreement was also reached to extend the repayment period from seven years to at least 15 years.
The EFSF is to be given revised powers that will allow them to provide new lines of credit in advance of countries requiring a bail-out as a precautionary measure, hopefully to facilitate tackling problems before they spread further.
The stock markets reacted favourably to early reports that an outline agreement had been reached but the full details and costs have still to be digested.
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