July 22nd, 2011
04:53 PM GMT
After weeks of deadlock and several hours of fraught negotiations, eurozone leaders finally agreed to award Greece a second eye-watering chunk of cash. The move caused stocks to rise, bond yields to fall and gave confidence to the euro, which gained against the dollar.
So far so good, but looking further into the future, numerous questions still remain unanswered.
Will the money be enough?
Greece will be getting EUR109 billion – or $157 billion – on top of EUR110 billion received last year.
This will solve the country’s cash crunch situation for the short term, enabling it to tackle huge portions of debt maturing between now and 2019.
On the other hand, Greece’s debt pile is now even bigger. Unless the country’s controversial austerity measures can kick-start growth, it’s hard to see when the nation will eventually be able to balance its economic productivity against its borrowings.
Having said that, if Greece does manage to eliminate its primary deficit (standing at a manageable 2%) it won’t need to access the bond markets for a while to come. This may sound complicated but essentially it means giving the country vital breathing space to restore its reputation and credit rating.
What about the haircut?
As European leaders well know, asking other countries to reach deep into their pockets to bail out their brother is politically divisive and won’t in itself solve the problem. What’s more, it’s an expensive option which, according to ratings agency Fitch may set a dangerous precedent for other struggling eurozone nations.
It is for these reasons that the financing offer includes a 20% haircut for private bondholders and a ten-year grace period, during which time Greece won’t have to pay any interest at all. Mind you, the haircut – or reduction in value of the bonds – is only voluntary. The Institute of International Finance (IIF) – the lobbying group for banks – says it's likely 90% of banks holding Greek debt will take up an offer of swapping the Greek debt they hold with longer-dated securities, providing around EUR50 billion of private sector funding.
How significant is a default?
January 2011: George Papandreou, Greek Prime Minister: "Greece won’t default."
June 2011: Jamie Dimon, CEO of U.S. Investment bank J.P Morgan: "Greece won’t default."
Some of the biggest names in politics and finances may well be eating their words today as Greece is set to be the first of 17 countries sharing the euro to default.
Still, the markets took solace in the fact that only a portion of Greece’s debts is expected to be in default and politicians generally agree it will be a price worth paying to try and restore economic stability to other peripheral eurozone nations in the eye of the storm.
But does the fact that a eurozone nation is likely to default on some of its debt mean that the euro is still a currency we can have confidence in?
Further, what does having a member of this family living a hand-to-mouth on help to pay its bills say about the finances of the whole bloc? An answer to that comes in the form of yields –for once not on Greek debt- but on German sovereign bonds, which are perceived as the safest obligations in the eurozone.
Yields on German 10-year bonds rose on the back of yesterday’s announcement.
I wonder whether that means investors are now less worried about Greece and more concerned about those countries –like Germany—tasked with bailing it out.
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