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My Big Fat Greek Rescue, Take 3: Summary, Pros and Cons

 

Well, good. Perhaps that last post got their attention!

Definitely a step closer to the ‘shock and awe’ effect needed to convince markets that in the end all will be ok and get PIIGS block borrowing costs lower. That’s how the Fed saved the world back in September of 2008. This EU accord has more concrete details about who lends (?)what, when, under what terms and conditions.

However, do curb your enthusiasm, as there are, ahem, a few remaining potential sticking points and ambiguities before Greece actually gets the cash, and really at what rate. Clearly the goal was to encourage Greece to stick to the open market.

Should Greece need the funds, there is likely to be some real pressure on the Euro. This crisis is still far, far from over. Even if/when Greece gets aid, there remain sovereign risks aplenty both inside and outside the EZ.

TERMS AND ANALYSIS

WHO LENDS TO GREECE?

All countries using the Euro and the IMF will contribute. Euro zone member states would contribute to the loans according to their respective holdings in the European Central Bank capital. For a detailed breakdown see: (here).

EU/IMF BURDEN SHARING

The euro zone would provide two-thirds of all loans requested by Greece and the IMF would supply the remaining one-third.

LENGTH OF STAND-BY LOAN PROGRAM

Generally three years, though a penalty clause for loans longer than that suggests longer terms are possible.

THE AMOUNT

30 billion Euros from the euro zone in the first year. The IMF could lend Greece up to 10-to-12 times its IMF quota of $1.25 billion, which would mean $12.5 billion to $15 billion (some 11.1 billion Euros). A senior Greek finance ministry official expected the IMF to lend Greece at least 10 billion Euros in 2010. He also indicated Greece was looking for a total of 80 billion Euros.

INTEREST RATES

For the euro zone, variable rate loans would be made on the basis of three-month EURIBOR rates, while fixed-rate loans will be based upon the rates corresponding to Euribor swap rates for the relevant maturities.

On top of that, there will be a charge of 300 basis points. An additional 100 basis points will be charged for loans longer than three years. In conformity with IMF charges, a one-time service fee of maximum 50 basis points will be charged to cover operational costs.

The statement said that for a three-year loan to Greece as of April 9, the interest would be "around five percent."

Our view: Clearly, the goal is to calm markets with the knowledge that the aid is ready, but to encourage Greece not to tap it.

HOW TO GET IT

Greece has to request the money, because it is unable to finance itself on the market.

Our view: The ECB and the European Commission then assess if this is really the case. A unanimous decision of euro zone finance ministers is the final go-ahead. The ECB pays out the money while the Commission acts as a coordinator of the bilateral loans.

OUR ANALYSIS: LURKING TROUBLE

The remaining uncertainty is the actual accessing of the funds – the EU assessment and unanimous approval needed. What conditions constitute agreeing that Greece can’t get the funding in the open market? Could one recalcitrant EZ finance minister blackmail the EU? For example could one PIIGS block member refuse approval in exchange for guarantees that they get the same deal or better, risking the collapse of the entire arrangement?

Also, never forget the underlying political subplots. For Angie Merkel to retain her political virtue, she must show she’s got to show she didn’t just roll over. Sarkozy will still do what he can to keep the IMF, lead by his chief political rival, out of the limelight.

Oh yes, and what kind of precedent is this for the rest of the PIIGS pen?

CONCLUSION

Definitely the best effort yet, and the EU has probably bought itself and Greece some time, possibly lower borrowing costs too. But so many questions remain. Again, could be years before we really know where this is going – and that’s if things work out well.

Disclosure: No Positions