Greece has been the hot topic for two years as it is the starting point for the European currency crisis. By using the euro, the country has given away its right to print its own money. The European Union has its own Central Bank, but not a Central Treasury. With the support of economic strength of Germany and France, weaker countries including Greece, Italy, and Portugal kept borrowing at low interest rates, even when their debts reached unsustainable levels.
If Greece could not be bailed out, the euro would have been threatened and the whole European economy would have been exposed to a depression. Greece is considered on the verge of "bankruptcy" next month. Without a timely bailout, the country would have been forced out of the eurozone. Luckily, after 12 hours of discussion on Monday, the European Union reached the decision to give Greece 130 billion euros ($170 billion) in additional bailout loans. It is expected that this amount of money will bring Greece's debt level down to 120% of GDP by 2020.
Jean-Claude Juncker, Luxembourg's Prime Minister said that the private investors of Greece - mainly investment funds and other banks - have been asked to take the loss of more than 53% on their bonds. Besides this, public creditors (including central banks) agreed to give Greece a break on its debt. Juncker commented:
The new program provides a comprehensive blueprint for putting the public finances and the economy of Greece back on a sustainable footing.
The interest on the first package of bailout loan is also cut by 0.5 percentage points over the next 5 years and 1.5 percentage points thereafter. This will cut 1.4 billion euros from the bailout package and lower the debt levels by 2.2 percentage points in 2020. Right after the news, the euro jumped to $1.3293 against the dollar in Asian trading time, before getting back to $1.3250 in early European trading.
The good news is that Greece is bailed out so that it can stay in the eurozone, further strengthening the currency and its stability. As the banks in France and Germany are main creditors of Greece, holding 60% of the total $1.3 trillion, this bailout package will help those banks avoid the prospect of bankruptcy as well. After this news, I think that the stock market will react very favorably to the rising trend in the next several days.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
