Greece gets new bailout with private help

Eurozone nations and IMF will give $155 bn,banks and private investors will contribute $71 bn.

Eurozone leaders agreed to a sweeping deal that will grant Greece a massive new bailout but likely make it the first euro country to default and radically reshape the currency unions rescue fund,allowing it to act pre-emptively when crises build up.

The deal resolves a political deadlock between Europes top economic authorities over how to save Greece that had investors worried that the debt crisis would spin out of control. Faced with the danger of big economies like Italy becoming unstable,the officials sought to outdo expectations at an emergency meeting in Brussels. The eurozone countries and the International Monetary Fund said on Thursday they will give Greece a second bailout worth (euro) 109 billion ($155 billion),on top of the (euro) 110 billion granted a year ago.

Banks and other private investors will contribute some (euro) 50 billion ($71 billion) to the rescue package until 2014 by either rolling over Greek bonds that they hold,swapping them for new ones with lower interest rates or selling the bonds back to Greece at a low price.

For the first time since the beginning of this crisis,we can say that the politics and the markets are coming together, said European Commission President Jose Manuel Barroso.

Initial reaction from markets and analysts to Thursdays deal was cautiously positive. The euro,which had rallied sharply on expectation of the deal,gained 1.2 per cent against the dollar.

The summit conclusions surprise by their size and range, Marie Diron,senior economic adviser to the Ernst & Young,said in a note. The measures imply significant private sector involvement and very large further support from the EU. All politically acceptable measures are being used. The deal on involving private creditors is widely expected to be considered a selective default by the ratings agencies,making Greece the first euro country to ever be in default if likely only for a short period of time.

Because of that,the eurozone will back up any new Greek bonds issued to the banks with guarantees. Those guarantees are necessary because Greek banks use Greek government debt as collateral for emergency support from the European Central Bank. Those bonds would no longer work as collateral if hit with a default rating,meaning Greek banks would lose the ECB support and quickly collapse.

Story continues below this ad

In case of bond rollovers or swaps,new Greek bonds issued to banks would have long maturities of up to 30 years and low interest rates,according to the Institute of International Finance,the group representing private sector creditors. French President Nicolas Sarkozy estimated rates to average 4.5 per cent.