After more than 12 hours of talks, the countries that use the euro have reached an agreement to give Greece 130 billion euros ($170 billion US) in additional bailout loans to save it from a potentially disastrous default next month.
The eurozone and the International Monetary Fund, which will be providing the money for the new bailout, hope the new program will eventually put Greece back into a position where it can survive without external support and secure its place in the euro currency union. Finance ministers from Greece and the other 16 euro countries meeting in Brussels wrangled until the early morning hours Tuesday over how that could be achieved.
On top of the new rescue loans, Athens will also ask banks and other investment funds to forgive it some 107 billion euros in debt, while the European Central Bank and other national central banks in the eurozone will forgo profits on their holdings.
Later in the day, Prime Minister Lucas Papademos issued a statement saying Greece must complete the private-sector debt swap by around March 10 in order to complete all the legal paperwork by March 20, when a critical debt repayment comes due.
The accord, which had been months in the making, seeks to reduce Greece's massive debts on all fronts, with both private and official creditors going beyond what they had said was possible in the past.
But despite those unprecedented efforts, it was clear that Greece, which kicked off Europe's debt crisis two years ago, was at the very best starting a long and painful road to recovery. At the worst, the new program would push the country even deeper into recession and see it default on its debts further down the line.
"It's not an easy [program], it's an ambitious one," IMF chief Christine Lagarde said, adding there is a significant risk Greece's economy might not grow as much as its international creditors are hoping.
The deal assumes the Greek economy will return to growth in 2013. But there’s a serious risk it will remain in deep recession — where it's been for the past four years — and be unable to pay back even its reduced debt load.
Success "really depends on the assumptions you make in terms of growth and interest rates," said Diego Iscaro, an economist at IHS Global Insight. "The risks are clearly on the downside. The main risk comes from the economic situation, the economic dire straits.
"By austerity alone, Greece will not solve the problems it has at the moment," Iscaro said. "We don't know when the economy will return to growth and how it will grow."
Unless something breaks the cycle of austerity and contraction "something will have to give," Iscaro said.
Another risk is that political outrage over the cutbacks could lead Greek politicians to balk at the tough conditions, which could push rescuer countries — led by Germany — to cut off further funding.
Elections in Greece are expected in April. The leaders of the two main parties have committed to the cuts and reform program, but anti-bailout parties have been gaining in the polls.
The eurozone — and Greece — had been under pressure to reach an accord quickly to prevent Athens from defaulting on a 14.5 billion euros bond payment on March 20. The fear is that an uncontrolled bankruptcy even of relatively small Greece could unleash market panic across the rest of the continent. That would further unsettle other struggling countries like Ireland, Portugal or the much bigger Italy or Spain.
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Despite the promise of new rescue loans, which come on top of a 110 billion euros bailout granted in 2010, the other 16 euro countries made clear that their trust in Greece is running low. Before Athens will see any new funds, it has to put into practice a whole range of previously promised cuts and reforms.
More significantly, Greece will have to pass within the next two months a new law that gives paying off the country's debts legal priority over funding government services. In the meantime, Athens will have to set up a kind of escrow account, managed separately from its main budget, that will at all times have to contain enough money to service its debts for the coming three months.
'Historic day for Greek economy'
These requirements, together with tighter on-the-ground monitoring, are an unprecedented intrusion into the fiscal affairs of a sovereign state in Europe and could eventually see Greece being forced to pay interest on its debt before compensating teachers, doctors and other state employees.
Greek politicians nevertheless greeted the package as a turning point for their beaten-up country.
"It's no exaggeration to say that today is a historic day for the Greek economy," said Greek Premier Lucas Papademos, who had rushed to the finance ministers' meeting to lend weight to his country's pleas for help.
The eurozone and the IMF said the deal is expected to bring Greece's debt down to 120.5 per cent of gross domestic product by 2020 — around the maximum that they consider sustainable. At the moment, Greece's debt stands at more than 160 per cent of GDP.
The euro surged 0.5 per cent as the news of a deal broke early Tuesday, trading at $1.327 US. But it later retreated, trading down 0.04 per cent at $1.324 US late in the afternoon.
But to reach a successful outcome, the finance ministers had to fight on many fronts.
The representatives of private holders of Greek debt had to agree to steeper losses than they had previously said was possible in a voluntary debt relief. The Institute of International Finance said that the bond swap could see Greece's debt reduced by 107 billion euros immediately, while longer repayment deadlines and lower interest rates will cut its debt servicing costs over the next decade.
Not only private investors had to give.
The eurozone countries will reduce the interest that Greece has to pay for its first package of bailout loans to 1.5 percentage points over market rates from between two percentage points to three percentage points currently, cutting both its debt load and limiting the need for new rescue loans.
At the same time, the European Central Bank and the national central banks in the countries that use the euro will forego profits on their Greek debt holdings, again reducing the costs for Greece.
"It's a very good accord in the sense that it is equitably divvied up," said French Finance Minister Francois Baroin. "The Greeks have made their efforts. The Europeans are playing their supporting role, in their role as creditors ... And the private sector part goes beyond" what could be expected.