Eurozone leaders agreed a €130 billion bail-out deal for Greece at their summit on Wednesday (26 October) – but the success of the plan and the actual amount relies on details to be worked out with the private sector in the weeks to come.

Presidents and prime ministers fell over themselves to hail the banking sector’s agreement for a voluntary bond exchange that will mean it will take losses, or ‘haircuts’, of 50%. The idea is to reduce Greece’s debt to 120% of gross domestic product (GDP) by 2020. As part of the deal, eurozone member states will contribute €100bn, plus another €30bn of collateral to encourage bondholders to take part.

Leaders said that this would prevent a disorderly Greek default. “France wanted to avoid a tragedy,” said Nicolas Sarkozy, the president of France at the end of the summit. “If Greece had defaulted, it would have been a tragedy.”

The agreement with bondholders has to be voluntary to avoid triggering credit-default swaps (CDS), the insurance policies on sovereign debt that, if activated, could have a devastating effect in spreading contagion throughout the eurozone.

Private-sector losses

The deal that the private sector would take losses of 50% has only been agreed in principle, with talks with the Institute of International Finance, which represents banks, lasting late into the night at the summit. It means that the eventual size of the bail-out and the cost to the taxpayer could look very different once everything is signed and sealed.

The next stage of negotiations will focus on the exact nature of the haircut. It is expected to consist of a programme of bond swaps. Talks are expected to last into January. If the involvement of the private sector is to be a success and reach the sort of levels spoken about by leaders at the end of the summit, nearly all holders of Greek bonds will have to take part.

The agreement reached by leaders of eurozone countries on 21 July set a target of 90% of bondholders participating in Greece’s bail-out. There is no target mentioned this time.

The need for an additional bail-out for Greece, with larger haircuts for the private sector, follows an assessment of the Greek economy made by the troika of the European Commission, the European Central Bank and the International Monetary Fund. That found that Greek debt was likely to rise to 186% of GDP in 2013, even taking into the 21% haircut agreed by banks after the deal on 21 July.

Eurozone leaders believe that reducing Greece’s debt to 120% will bring it back to the path of sustainability.

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