A 50% reduction in Greece's debt

A 50% reduction of the Greek debt burden, an increase in the capacity of the EFSF (European Financial Stability Facility) Eurozone bailout fund and the recapitalisation of European banks with some €106 bn are the three main aspects of the bailout plan aimed at dealing with the debt crisis. This was agreed after eight-hour talks between EU leaders this evening.

The most serious losses will be faced by Greek credit banks, which must write off voluntarily 50% of the nominal value of the purchased Greek government bonds. As a result of this benevolent gesture, the debt of the country will be reduced by some €100 bn. Greece's debt will shrink from 160% to 120% by 2020. In return, the Eurozone promised to offer "credit sweeteners" worth €30 bn to the private sector in order to guarantee the remaining value of the new bonds. The objective of EU politicians is to make the private sector retreat so that negotiations on the bailout package can be finalised quickly.

The second financial rescue programme for Greece will be drawn up before 2012, confirmed European Commission President Jose Manuel Barroso. According to various sources, the new bailout package will amount to €130 bn.

"Now, our debt is absolutely stable," stated Greek Prime Minister George Papandreou without hiding his satisfaction, cited by Reuters after the summit. "Greece can settle its past accounts once and for all," pointed out the PM and promised that thanks to the bailout deal the country will no longer accumulate budget deficits so easily. Nevertheless, the debt reduction is expected to inflict huge losses to local banks and public pension funds, which hold Greek bonds worth over €100 bn. According to PM Papandreou, this situation will result in the "temporary nationalisation" of some private banks.

Another conclusion drawn by EU leaders referred to the additional capital of €106.4 bn needed by European banks in order to reach a 9% capital adequacy. Pursuant to the recapitalisation plan concerning about 70 banks, this target must be achieved by June. In the meantime, banks will be prohibited to pay dividends and bonuses.

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