The new Greek bailout will not trigger a “credit event” despite the participation of Greece’s private creditors, European Central Bank chief Jean-Claude Trichet said Thursday.
“I don’t think experts consider that what has been done would trigger a credit event,” Mr. Trichet said after the bailout was agreed at a Eurozone summit.
But he refused to “prejudge” whether the bailout, which includes 109 billion Euros in loans from the EU and IMF and another 49 billion Euros from private bondholders, will spark a default.
The news of a second Greek bailout drove the US stock indexes higher. In addition to Europe’s new package of rescue loans to Greece, the old continent is also planning to lower interest rates and lengthen payback terms for Greece, Ireland and Portugal.
The Dow Jones industrial average rose 152 points, or 1.2 percent, to close at 12,724 Thursday. The S&P 500 index rose 18 points, or 1.4 percent, to 1,344. The Nasdaq composite index rose 20 points, or 0.7 percent, to 2,834.
Four stocks rose for every one that fell on the New York Stock Exchange. Volume was higher than average at 4.4 billion shares.
Four options offered to the country’s private sector creditors to contribute, including a debt exchange plan and a buyback scheme to reduce Greece’s debt pile by 13.5 billion euros, the leading bank lobby group said.
The Institute of International Finance on Thursday said the menu of new instruments is being offered to investors to attract 90 percent participation in the plan.
According to IIF private banks have offered to exchange and roll over Greek debt that will save the country 54 billion euros ($77.6 billion) over three years and a total of 135 billion euros from mid-2011 to end-2020.
The IIF, which has coordinated the banks’ role in negotiations on a new Greek bailout package, said the plan was based on the “voluntary” participation of investors, and it aimed for 90 percent participation by private bondholders.
The banks also called on Greece to redouble its efforts in economic reform.
“As part of a comprehensive plan, including additional support by the IMF and the redoubling of adjustment efforts by Greece, we are prepared to participate in a voluntary program of debt exchange and a buyback plan developed by the Greek government,” the IIF said.
“This will provide financing to Greece of 54 billion euros from mid-2011 to mid-2014 and a total of 135 billion euros from mid-2011 to end-2020,” it said.
The proposed plan involves exchanging and rolling over current Greek bonds into 15- and 30-year instruments with interest rates equivalent to fixed coupons between 4.5 percent to 6.42 percent.
“The interest rates are structured to maximize the benefits to Greece in the early years of the program as Greece regains access to global capital markets,” the IIF said.
“Our offer is conditioned on the comprehensive economic reform program of Greece, the strong support of the EU, which has just been reinforced, and additional support by the IMF.”
Thirty banks, mainly from Europe, were listed in support of the offer.
“We expect support to build as the offer and the comprehensive program surrounding it is more widely disseminated.”
On Thursday, a Euro zone source said that a buyback of Greek debt is the only form of private sector involvement in the second Greek bailout that has a chance of not triggering a downgrade to a selective default rating of Greek debt.
Asked how such a buyback could be organized, the official, who asked not to be identified, said:
“We will have a little bit of time to organize it - it would be structured in such a way that we would get the expected results in terms of involvement of investors and at the same time it would not destabilize markets,” the source said.
“We have a fairly good idea about the amounts of Greek bonds outstanding in the private sector and the market value we would add a little premium to that. If you do that you can get a fairly substantial amount,” the official said.
Asked if such an operation could reduce Greek debt by about a third, the source said:
“One third of the debt would be a little bit ambitious.”
(Dina Al-Shibeeb, a senior editor at Al Arabiya English, can be reached at: email@example.com)