Greece Is Out of the Fire

Euro zone finance ministers and the International Monetary Fund finally reached an agreement to reduce Greece’s debt and clear the way for the release of the next batch of aid loans, cheering the stricken country as well as the financial markets. The decision marked the end of weeks of discussions and false starts and it puts an end to worries that the near-bankrupt country will default on its financial obligations anytime soon.

Greece will receive a 34.4 billion euro, or $44.7 billion, loan installment in December. As part of the agreement, the creditor countries decided to cut the interest rates on already extended bilateral loans from the current 150 basis points above financing costs to 50 bps, suspended interest payments for a decade to give the nation additional time to repay, and designed a new bond buyback plan.

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The measures will help cut Greece’s debt from 190 percent of gross domestic product in 2014 to the IMF-ordered 124 percent of GDP in 2020. The IMF agreed to raise its previous target of 120 percent.

Greece will still be required to deliver on its commitments to earn each additional loan payout, but the finance ministers promised “further measures and assistance” if it goes on to post an operating budget surplus. That could mean a write-off on some loans in 2016, though Germany and its northern allies have, in public, rejected that possibility.

“I very much welcome the decisions taken by the ministers of finance,” ECB President Mario Draghi said, according to Bloomberg. “They will certainly reduce the uncertainty and strengthen confidence in Europe and in Greece.”

But while the euro gained, European shares rose to near a three-week high, and Greek 10-year bonds advanced, some investors expressed doubts about Greece’s ability to stick to the economic discipline required of it. There were also worries about whether the bond buyback will generate sufficient savings.

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