EU Delivers New Funding Plan For Greece, Extends EFSF

By: Milla Shaw in Forex Consultant on Jul. 21, 2011

The EU summit ended with new measures to fund Greece and stabilize the sovereign crisis in the Eurozone as a whole. The result surprised to the upside as it delivered plans to provide liquidity to Greece and to substantially improve the country’s public finance. The leaders also agreed on an ambitious reform of the EFSF, making it more flexible and effective, Yet, the drawback is that the document did not provide enough details on the reform of the EFSF.

EU finance ministers agreed on a new bailout package for Greece. The total funding offered by the EU/IMF will be 109B euro, an amount higher than the projected deficit of 103B euro from 2011-2014. Involvement in private sector will be on a ‘voluntary basis’ and the total contribution will be around 50B euro (the net contribution of 37B euro and 12.6B euro from a debt buy back program). Greece will have to accelerate implementation of fiscal consolidation measures including privatization of Government assets worth of 50B euro. The document stressed that the private sector involvement arrangement is an ‘exceptional and unique solution’ for Greece only. All other euro countries ‘solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms’. Interest rates are lowered to 3.5%. Maturity of the loan, as well as other loans from the EFSF in the future, will be extended ‘from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years’. Rate reduction and maturity extension should also benefit Portugal and Ireland on their current debts, too.

In order to avoid contagion of the crisis, the leaders also reached a common position to enhance the importance of ESFS, giving it the ability to buy Eurozone debts in secondary markets on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement of the EFSF/ESM Member States. The fund can also give countries ‘precautionary’ credit lines and recapitalize financial institutions through loans. It’s also stated ‘a collateral arrangement’ will be put in place where ‘appropriate’. Yet, we see no further discussions on the type of collateral that would be pledged.

ECB President Trichet had stressed that the central bank would not accept defaulted debts as collaterals. His stance has been softened since he participated in the talks between Germany and France ahead of the summit. As stated in the document, as part of the private sector involvement arrangement, ‘credit enhancement will be provided to underpin the quality of collateral so as to allow its continued use for access to Eurosystem liquidity operations by Greek banks’. This apparently shows that the ECB may ignore this criterion as the governments have pledged additional support to Greek debts and enhanced the ability of the EFSF.

Initial market reactions were positive as the measures endeavored to stabilize the debt situation. Reassurance that the private sector investment scheme is restricted to Greece should ease concerns about contagion to Ireland and Portugal. The drawback to yesterday’s plan is that there’s no increase in the size of the EFSF. This would limit the fund’s effectiveness to react swiftly, especially when the fund has no cash buffer to act on the markets.

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