The €130 billion Greek bailout package approved by European finance ministers earlier today will end the threat of an uncontrolled default, European Commission president Jose Barroso has said.
"The agreement is an essential step forward, for the country and for the euro area as a whole," he told journalists in Brussels today. "It closes the door to a scenario of an uncontrolled default."
Fiscal consolidation and structural reform are the only way Greece can move forward, Mr Barroso said.
Euro zone finance ministers sealed a second bailout for debt-laden Greece in the early hours of this morning which resolves the country’s immediate financing needs.
After 13 hours of talks, euro zone officials said ministers had finalised measures to cut Greece's debt to 120.5 per cent of gross domestic product by 2020, a fraction above their original target of 120, after negotiators for private bondholders accepted bigger losses to help plug the funding gap.
Agreement on the rescue package, subject to strict conditions, will help draw a line under months of uncertainty that has shaken the currency union, and avert an imminent Greek bankruptcy. As part of the deal, the European Union plans to deploy a permanent team of foreign inspectors to monitor the country's finances, seen by many Greeks as a humiliating surrender of sovereignty.
"A nightmare scenario was avoided," said Greek finance minister Evangelos Venizelos in Athens. "It is maybe the most important (deal) in Greece's post-war history."
"It's an important result that removes immediate risks of contagion," Italian prime minister Mario Monti told a news conference in Brussels today.
Minister of State at the Department of Finance Brian Hayes hailed the deal as “very significant”.
Mr Hayes, who attended the talks in the absence Minister for Finance Michael Noonan, said the Greek bailout accord represented a "final part of the jigsaw," and that the "prize now for Europe, Ireland and the euro zone is stability."
The accord will enable Athens to launch a bond swap with private investors to help reduce and restructure its vast debts, put it on a more stable financial footing and keep it inside the 17-country euro zone.
About €100 billion of debt will be written off as banks and insurers swap bonds they hold for longer-dated securities that pay a lower coupon, although it is not clear how many will take the deal.
Private sector holders of Greek debt will take losses of 53.5 per cent on the nominal value of their bonds. They had earlier agreed to a 50 per cent nominal writedown, which equated to around a 70 per cent loss on the net present value of the debt.
"Given the balanced agreement reached with the creditor group ... and the fact that the package delivers debt sustainability for Greece we expect a high participation rate," Luxembourg's prime minister and Eurogroup head Jean-Claude Juncker said.
The debt sustainability report delivered to ministers last week showed that without further measures Greek debt would only fall to 129 per cent by 2020.
The IMF had said if the ratio was not cut to near 120 per cent, it may not have been able to help finance the bailout, putting the whole scheme in jeopardy. To help fill the financing gap, euro zone central banks will also play their part.
A Eurogroup statement said the ECB would pass up profits it has made from buying Greek bonds over the past two years under its emergency bond-buying programme to national central banks for their governments to pass on to Athens "to further improve the sustainability of Greece's public debt".
The ECB has spent about €38 billion on Greek government debt that is now worth about €50 billion.
Whatever its constituent parts, economists say the deal may only delay a deeper default by a few months. A turnaround in the economy could take as much as a decade, a prospect that brought thousands of Greeks onto the streets to protest against austerity measures on Sunday.
Sceptics question whether a new Greek government will stick to the deeply unpopular programme after elections due in April, and say Athens could again fall behind in implementation. That could prompt lenders to pull the plug once the euro zone has stronger financial firewalls in place.
While there are doubts in Germany and other countries that Greece will be able to meet its commitments, including implementing €3.3 billion of spending cuts and tax increases, the threat of contagion from a chaotic Greek default always made a deal more likely than not, no matter how tortuous the negotiations.
Greek prime minister Lucas Papademos, IMF managing director Christine Lagarde and ECB president Mario Draghi attended the Brussels talks, signalling they were likely to be decisive.
The private creditor bond exchange is expected to launch on March 8th and complete three days later, Athens said on Saturday. That means a €14.5 billion bond repayment due on March 20th would be restructured, allowing Greece to avoid default.
Reuters