EUR saved again but for how long?
After 18 months of wrangling, European leaders have finally agreed to a new 109 billion euro bailout of Greece. The deal reached at an emergency summit in Brussels yesterday, will require private bondholders to share the burden for the first time. What does this mean in practice? Well, private owners of Greek debt like banks and hedge funds will ‘volunteer‘ to either exchange or rollover their existing holdings into longer maturities – just like an individual struggling to pay their debt back may choose to pay it over a longer term to reduce their payments. In addition, a bond buyback programme will see some bond holders sell their debt holdings at a reduced price – remember Greek debt is rated by credit agencies as ‘junk’ so is worth less than when it was issued anyway. As a result, this is likely to cut 26 billion euros from Greece’s 350 billion Euro debt pile by 2014 and with even more savings to follow this is likely to give Greece a more realistic chance of managing its debt burden in the future. There was also good news for Ireland and Portugal who saw the interest rate on their bailout terms reduced to about 3.5% – saving Ireland between 600 – 800 million euros a year. In addition, the current eurozone bailout fund will for the first time offer countries precautionary credit lines, essentially cheap loans should money markets make it too expensive to borrow – measures aimed at assisting Spain and Italy. Market reaction to the news was positive, with the euro gaining against the pound to trade at 1.1309 this morning. The euro also made gains against the dollar to reach a two week high of 1.4420, before falling back slightly to 1.4398 after the German IFO survey release indicated the euro zone’s biggest economy was slowing. Against the pound the dollar was trading at 1.6285, with reduced ‘safe haven’ support for the dollar and poor jobless data released in the States yesterday weighing on the greenback.