€130 billion bailout agreed for Greece

Eurozone ministers have agreed a €130 billion (£110 billion) rescue package for beleaguered Greece, after talks went through the night.

The debt-ridden nation has promised to reduce its debts to 120.5% of GDP by 2020, down from a current debt ratio of 160% in relation to the country’s economy.

Greece needs the money to pay back loans that mature on 20 March, when €14.4 billion needs to be repaid.

Private holders of Greek debt are expected to take a haircut on their investments, losing 53.5% rather than the previously thought 50% on the value of their bonds.

In return for the bailout funds, Greece has agreed to ringfence funds in a special account to prioritise debt repayments, and will be subject to increased monitoring of its reform efforts by the EU.

Greek Prime Minister Lucas Papademos labelled it a ‘historic day for the Greek economy’ as the rescue package was announced.

However, commentators disagree with his optimism.

Chris Towner, director of advisory services at currency firm HiFX, believes the Greek issues are still ‘not resolved’.

‘There is not much meat left on the bone in the Greek economy. Pushing through austerity measures on an economy that contracted by 7 per cent in the fourth quarter [of 2011] is hardly going to lead to a celebration on the streets of Athens,’ he says.

Towner adds: ‘It is certainly good news that the systemic risk of a messy default is expected to be avoided now, but the reality of spending cuts will not go away for decades.’

David Miller, partner at Cheviot Asset Management, calls the decision ‘the least worst outcome’, but adds that there is still ‘considerable scope’ for the country backtracking on the draconian debt reduction programme.

‘The lack of economic growth in peripheral Europe and structural imbalances are slowly being mixed into the crisis,’ he says, calling the creation of the European Financial Stability Facility merely a ‘temporary fix’ for the ongoing debt crisis.

‘This crisis has always been more about the politics than the economics. With a Greek election in April, it will be time for the voters to have their say.’

Jennifer McKeown, senior European economist at Capital Economics, says the second bailout package will only ‘prolong the Greek recession’ and leave its membership of the eurozone ‘on the edge’.

She admits that the risk of a disorderly Greek default has at least been avoided.

McKeown adds: ‘But with the recession thwarting debt reduction efforts and public outrage growing, we still see Greece leaving the eurozone before the year is out.’

Rob Burgeman, divisional director at stockbroker Brewin Dolphin, highlights that the UK cannot be ‘immune’ from wider economic disruption in Europe.

‘In much the same way that the owner of a semi-detached house cannot be unaffected by a fire in his neighbour’s property and this may, in the end, leave the AAA rating vulnerable.’

However, Burgeman believes the Greek crisis will not have ‘significant ramifications’ for the UK in the short term.

Effect on private investors

Burgeman believes the economic crisis is likely to leave interest rates at record lows for the ‘forseeable future, as well as providing incentive for more quantitative easing.

He adds: ‘This underpins our recommendation that investors should continue to ensure that they have some exposure to assets that will provide them with the potential for “real” (inflation adjusted) returns over the medium term.

‘In particular, blue chip equities with a global presence are likely to remain in demand, especially when compared to the negative real return currently available on perceived “risk free” assets such as cash and government bonds.’