The Euro bailout, agreed in principle this week, has three related components. Firstly, the write-off of 50% of Greek debts held with private banks. It is estimated that the effect of this will be to reduce Greek debt to 120% of GDP by 2020 – down from a projected 180%. The second element is the agreement to boost the bailout fund, the European Financial Stability Facility (EFSF), to €1 trillion. The Luxembourg based EFSF, which is part of the European Financial Stabilisation Mechanism (EFSM), was designed to provide temporary financial assistance to Euro states. It is supported by the 17 Euro members and the IMF, with Germany is the single biggest guarantor. Together, Germany and France provide 50% of the total guarantees. The final part of the package involves the recapitalisation of European banks to the tune of €106 billion, designed to protect the banks from future defaults.
Current debt levels for selected countries:
The IIF (Institute of International Finance), which represents most of the world’s largest commercial banks and investment banks, as well as a growing number of insurance companies and investment management firms, succumbed to pressure from European leaders to accept the 50% write-down of Greek debt. Dr. Ackermann, Chairman of the Board of Directors of the IIF, stated that: “The Greek economy has weakened considerably since July, and all parties have recognised that not only the future of Greece but the future of Europe was at stake. The outcome is a good one for Greece, Europe and the investors, and we look forward to its early implementation.”
The immediate effect of Thursday’s announcement was to calm the markets, and push up the value of the Euro to two-month high against the US dollar, although uncertainty over the precise details still remains.