There is a default, and the deal gives sweeping new powers to the ECB. How do you say Bernanke-style money printing in German. Follow-up analysis from Reuters below.
BRUSSELS — After weeks of uncertainty that revived fears about the foundations of the euro, European leaders on Thursday clinched a new rescue plan for Greece that could push the country into default on some of its debt for a short period but would give Europe’s bailout fund sweeping new powers to shore up struggling economies.
At a press conference late Thursday, German Chancellor Angela Merkel confirmed the 109-billion-euro aid package for Greece. European officials also said that financial institutions that own Greek bonds would contribute 50 billion euros through 2014 through a combination of debt extensions and the purchasing of discounted Greek bonds on the secondary market.
The outlines of the plan worked out by the 17 euro zone heads of government seemed particularly bold, dealing with the economic problems of bailed-out Ireland and Portugal as well as Greece, and calling for nothing short of a “European Marshall Plan” to get Greece itself on a road to recovery. The underlying economies of those countries — and others — remain remarkably frail, however.
On the central issue of extending debt, rating agencies had already issued strong warnings that such steps might constitute a limited form of default because creditors would not be repaid in full on the original terms.
More on the story from Reuters Felix Salmon.
The latest Greek bailout is done — the official statement is here — and it involves Greece going into “selective default,” which is, yes, a kind of default.
I can’t remember a major financial story which has been covered so inadequately by the financial press. All the incomprehensible eurospeak seems to have worked, along with the fact that the deal was announced in Brussels, where the general level of journalistic financial literacy is substantially lower than it is in London or New York or Frankfurt. On top of that, statements are coming from so many different directions — Eurocrats, heads of state, the Institute of International Finance, Greek officials, Portuguese and Irish officials, you name it — that it’s extremely hard to put it all together into one coherent whole.
Oh, and to complicate things even further, most of the day’s discussion was based on various widely-disseminated draft documents which differed substantially from the final statement.
This is a bail-in as well as a bail-out: while Greece is getting the €109 billion it needs to cover its fiscal deficit, both the official sector and the private sector are going to take losses on their loans to the country.
As such, it sets at least two hugely important precedents. Firstly, eurozone countries will be allowed to default on their debt. Secondly, a whole new financing architecture is being built for Greece; French president Nicolas Sarkozy called it “the beginnings of a European Monetary Fund.”
Updated with analysis from Reuters and the official EU statement.