Greece to get new $170 billion bailout

BRUSSELS — After more than 12 hours of talks, the countries that use the euro reached an agreement early Tuesday to hand Greece €130 billion ($170 billion) in additional bailout loans to save it from a potentially disastrous default next month.

The eurozone and the International Monetary Fund, which will be providing the money for the new bailout, hope the new program will eventually put Greece back into a position where it can survive without external support and secure its place in the euro currency union. Finance ministers from Greece and the other 16 euro countries meeting in Brussels wrangled until the early morning hours over how that could be achieved.

On top of the new rescue loans, Athens will also ask banks and other investment funds to forgive it some €107 billion in debt, while the European Central Bank and other national central banks in the eurozone will forgo profits on their holdings.

The accord, which had been months in the making, seeks to reduce Greece's massive debts on all fronts, with both private and official creditors going beyond what they had said was possible in the past.

But despite those unprecedented efforts, it was clear that Greece, which kicked off Europe's debt crisis two years ago, was at the very best starting a long and painful road to recovery. At the worst, the new program would push the country even deeper into recession and see it default on its debts further down the line.

"It's not an easy (program), it's an ambitious one," said Christine Lagarde, the head of the IMF, adding that there were significant risks that Greece's economy could not grow as much as its international creditors were hoping.

The eurozone — and Greece — had been under pressure to reach an accord quickly to prevent Athens from defaulting on a €14.5 billion bond payment on March 20. The fear is that an uncontrolled bankruptcy even of relatively small Greece could unleash market panic across the rest of the continent. That would further unsettle other struggling countries like Ireland, Portugal or the much bigger Italy or Spain.

Despite the promise of new rescue loans, which come on top of a €110 billion bailout granted in 2010, the other 16 euro countries made clear that their trust in Greece is running low. Before Athens will see any new funds, it has to put into practice a whole range of previously promised cuts and reforms.

More significantly, Greece will have to pass within the next two months a new law that gives paying off the country's debts legal priority over funding government services. In the meantime, Athens will have to set up a kind of escrow account, managed separately from its main budget, that will at all times have to contain enough money to service its debts for the coming three months.

These requirements, together with tighter on-the-ground monitoring, are an unprecedented intrusion into the fiscal affairs of a sovereign state in Europe and could eventually see Greece being forced to pay interest on its debt before compensating teachers, doctors and other state employees.

Greek politicians nevertheless greeted the package as a turning point for their beaten-up country.

"It's no exaggeration to say that today is a historic day for the Greek economy," said Greek Premier Lucas Papademos, who had rushed to the finance ministers' meeting to lend weight to his country's pleas for help.

The eurozone and the IMF said the deal is expected to bring Greece's debt down to 120.5 percent of gross domestic product by 2020 — around the maximum that they consider sustainable. At the moment, Greece's debt stands at more than 160 percent of GDP.

The euro surged 0.5 percent as the news of a deal broke early Tuesday, trading at $1.327.

But to reach a successful outcome, the finance ministers had to fight on many fronts.

The representatives of private holders of Greek debt had to agree to steeper losses than they had previously said was possible in a voluntary debt relief. The Institute of International Finance said that the bond swap could see Greece's debt reduced by €107 billion immediately, while longer repayment deadlines and lower interest rates will cut its debt servicing costs over the next decade.

Not only private investors had to give.

The eurozone countries will reduce the interest that Greece has to pay for its first package of bailout loans to 1.5 percentage points over market rates from between 2 percentage points to 3 percentage points currently, cutting both its debt load and limiting the need for new rescue loans.

At the same time, the European Central Bank and the national central banks in the countries that use the euro will forego profits on their Greek debt holdings, again reducing the costs for Greece.

"It's a very good accord in the sense that it is equitably divvied up," said French Finance Minister Francois Baroin. "The Greeks have made their efforts. The Europeans are playing their supporting role, in their role as creditors ... And the private sector part goes beyond" what could be expected.