Greece: Light at last. Euro zone members have finally detailed the terms and conditions under which they would help Greece sort out its financial mess. Up to 30 billion euros of loans could be extended for three years with an interest rate of 5.3 per cent, with the International Monetary Fund providing another 15 billion euros at a cheaper rate.
Greece still hopes that the mere announcement of the bailout's conditions will be enough to narrow the punishing spread it has to pay on its debt — so that it doesn’t actually need to tap the funds. That's a sensible ambition — not least because the euro zone deal is only supposed to be triggered as a last resort and Germany, which faces an important regional election on May 9, won’t bend the rules before then.
The immediate market reaction has been positive. The yield on 10-year bonds shrank about 60 basis points to 6.5 per cent. But this may still be unsustainably high from a long-term perspective. And Greece faces market tests later this month — and probably for years to come — before the default option can be decisively taken off the table.
The main point of the agreement is that finance ministers have agreed on what non-subsidised rates meant. This was one of the conditions set by Germany to green-light the broad outlines of the plan on March 25. Since then persistent disagreement on the meaning of the clause had helped send Greek bonds into a spin. Germany wanted to make Greece pay market rates, while European Central Bank President Jean-Claude Trichet suggested that non-subsidised simply meant rates aligned with the rest of the euro zone.
The compromise is sensible: for fixed-rates loans, Greece would be charged the Euribor three-year swap rate plus 3.5 per cent — or 5.3 per cent under current market conditions. Given that yields on French and German three-year debt are roughly 1.5 per cent, that’s a substantial penalty, but not a deadly one.
Once cheaper IMF money is factored into the equation, the blended rate for the entire bailout programme would come down to about 4.5 per cent. Prime Minister George Papandreou still faces an uphill struggle given his heavy and mounting debt load and uncompetitive economy. But at least he knows what he can expect from his allies — eventually.
