Market Overview

Greece, Eurozone Reach Bailout Agreement


Prolonged talks between Greece and its lenders have finally produced an agreement in which Greece will its second bailout. The numbers coming out of the talks' chambers are €130 billion and 121 percent.

€130 billion is how much the second round of funding Greece will take to help meet its funding gap to service past-due interest, swap old bonds for new ones, and--if anything is left over--funnel some into its brow-beaten economy.

121 percent is the size of the country's debt in relation to its GDP by the time the year 2020 rolls along. That is, if Greeks stick to the spartan strings that come attached to the funds.

With no action on needed reforms in the form of tax hikes and cost cuts, 2020 may find Greece with a national debt that measures a full 160 percent of its GDP.

The debt agreement appears to have been reached as lenders finally relented to taking a deeper haircut than previously agreed upon. Thus, private Greek-debt holders will forgo 53.5 percent of their holdings' nominal value, compared to 50 percent they had been willing to let go before, which was already a 70 percent loss in terms of net present value.

Agreement rests on the assumption that Greeks will commit to taking further austere steps to shore up their finances. In order for the assumed agreement goals to be tenable, Greece will have to raise higher taxes while cutting more cost out of its system.

The trouble is, the Greek economy appears to be at the end of its rope, having shrunk an annualized 7 percent in the last three months of 2011 compared to same period in 2010. How one gets higher taxes out of an economy in such conditions is still an elusive answer.

Further muddying the optimism from the debt agreement is the uncertainty of whether a brand new government expected after the April elections in Greece will stick to it. As Greek candidates have hinted at such reneging, Germany and other countries doling out the funds are believed to have safeguards in place to react swiftly. At which point, everything is back to square one, which Greece much closer to exiting Europe.

For now, Euro has soared on the news an agreement is in place.

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