Portugal is to benefit from a fundamental alteration to European Commission rules affecting billions of Euros worth of bailouts for Portugal, Greece and Ireland.
It will now pay lower interest rates of 3.5% on its €78 billion bailout fund from 2012 and gets an extension to repay the debt from 7.5 years to 30 years.
Under the terms of an agreement reached last week in Brussels at an extraordinary meeting of Euro leaders, the bailout fund known as the European Financial Stability Fund (EFSF) will now, in effect, be issuing Eurobonds to benefit these countries.
The new Greek bailout includes a further loan worth €109 billion from the EFSF to run until 2014 from which €50 billion will come from private creditors in a deal which, in practice, represents a restructuring and repayment extension on its debts which total €340 billion or 160% of its GDP.
At the same time, the EFSF can now be used as a vehicle to buy up Greek debt on the secondary markets (the sovereign bond markets) at market prices which are currently half their nominal value.
Private creditors – banks, insurance entities and pension funds – will all be involved in these operations until 2019 which will bring their total contribution to €106 billion for the entire period.
The European Union had made a point of stressing that the extra cash injection is solely for Greece, to avoid either Portugal or Ireland attempting to have their debts restructured.
The move had been opposed for weeks by the European Central Bank which stated that it could not, under its regulations, accept Greek debt as a guarantee in order to loan money to the country’s commercial banks, which would immediately cause them to go bankrupt. However, the recent decision represents a radical departure from both the ECB and German positions held since the beginning of the sovereign debt crisis.
The U-turn comes as a direct result of fears that if Greece defaulted on its financial obligations to creditor nations – namely Germany – that market speculation and jitters would spread to Italy and Spain and throw the entire single currency into chaos.
Markets have already reacted to the move, with Moody’s cutting Greece credit rating by three points.
The agreement reached last Thursday also includes a reduction by two percentage points in the interest rates on new EFSF loans (the bailout fund entity) to Greece to a rate of 3.5% as well as a repayment extension to 30 years.
At the same time, the periods allocated to Portugal to repay its bailout have also been extended from 7.5 years to 30 years.
Portuguese Prime Minister Pedro Passos Coelho made it clear that the new terms did not provide any pretext to think that there could be a letup in meeting the terms of the ‘Troika’ agreement.
“The country is going through extremely difficult and demanding times,” he stressed, adding that the new agreement made the “road Portugal was following more sustainable.”