New European Bail Out Announced - Greek Debt Gets a HairCut

We have another Eurozone bail out. The Euro Summit has released a 15 page statement (pdf) overviewing the agreement. The plan was ratified by all 17 Member States of the euro area.

First, there is a haircut on Greek debt, which while pretending to be voluntary, the volunteer or else threat behind it would allow a complete Greek default, where bond holders would get nothing and banks would probably be ruined.

We invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors. The Euro zone Member States would contribute to the PSI package up to 30 bn euro.

The plan is to reduce Greek debt to 120% of GDP by 2020 and is about €100 billion reduction with yet another €100 billion in additional aid.

Greek bailout merely the first

Harvard Professor Kenneth Rogoff is warning that the IMF bailout of Greece is just the first of many to come.

“It’s more likely than not that we’ll need an IMF program in at least one more country in the euro area over the next two to three years,” Rogoff, a former IMF chief economist who has co-authored studies of financial and sovereign debt crises, said in a telephone interview. “The budget cuts needed in Europe in many countries are profound.”
Portuguese, Spanish and Irish bond yields jumped last week as investors questioned their ability to reduce budget deficits and avoid Greece’s fate....
At 14.3 percent of gross domestic product, Ireland had the euro region’s largest deficit last year. Greece’s was 13.6 percent, Spain’s was 11.2 percent and Portugal’s 9.4 percent.

Size matters for Greek bailout

The reason why the bailout of Greece is still in question is the moral hazard it would create throughout the rest of southern Europe. And the price tag is steep.

(Bloomberg) -- Europe may need to stump up as much as 320 billion euros ($441 billion) if it decides to bail out Greece because it would open the door to rescuing other countries in financial distress, according to BNP Paribas.
“To come up with a bailout plan that would be reasonably certain of success, it would have to cover all the most likely candidates, and it would have to be big,” said Paul Mortimer- Lee, global head of market economics at BNP in London. “Size matters when you are trying to scare off speculators and to comfort nervy bondholders.”