Plans for an ambitious new euro-zone rescue package are coming together, according to the International Monetary Fund, and are expected to involve a 50% write-down of Greece’s government debt. The plan is also expected to increase the size of the euro-zone bailout fund, the European Financial Stability Facility, to 2 trillion euros. European governments hope to have the new plan in place within five to six weeks.
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This weekend, the G20 also reasserted its commitment to “a strong and coordinated international response” to the crisis, but analysts don’t think it will be enough to reassure investors. “Given that there were no details on how [the G20 would combat the crisis], it will not do much to alleviate market stress without some concrete action,” said Mitul Kotecha at Credit Agricole.
The IMF package is expected to quadruple the EFSF bailout fund’s current projected total of 440 billion euros by allowing the European Central Bank to lend alongside the fund, though the EFSF would be taking on the main risk of lending.
It is also thought that private investors in Greek debt will likely have to take a 50% reduction in what they are owed. In July, euro-zone leaders agreed to, but have yet to ratify, a plan to reduce Greece’s repayments to banks by about 20%. Though world leaders have said they will not allow Greece to default, some reports suggest they will allow a partial default on some Greek debts while allowing the nation to remain in the 17-nation common-currency region.
The third aspect of the rescue plan is expected to help strengthen big banks by increasing their capital so they can better absorb losses tied to Greece and other sovereign debt.
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This week, EU and IMF officials will return to Athens where they will examine the country’s progress in reducing its deficit through a series of austerity measures, which they will then use to determine whether the country whether Greece receives its next tranche of aid. Analysts say there is a real possibility that Greece will not receive next month’s loan, which would leave the nation unable to meet its debt payments by the middle of October.