Doubts over viability of new Greece rescue deal

'Historic' package leaves nation little hope of escaping debt spiral, warn analysts

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The Independent Online

Relief at Greece's fresh bailout package, which has averted the threat of a catastrophic default by Athens next month, was undermined yesterday by growing doubts about the sustainability of the agreement.

The Greek Prime Minister, Lucas Papademos, called it an "historic day" after the €130bn (£109bn) deal was concluded early on Tuesday. And European finance ministers said in a statement that it provides a "comprehensive blueprint" for putting Athens' public finances on a sustainable footing by reducing the country's debt to GDP ratio to 120.5 per cent by 2020. But some financial analysts have already suggested that the deal will unravel long before then.

"Greece is caught up in a full-blown debt spiral and no one has any certainty over what happens to GDP growth a quarter from now, let alone a decade out," said David Owen of the US investment bank, Jefferies. "More likely than not... events will blow the country off course."

That pessimistic view was reinforced by a confidential document on Greece, compiled by European and IMF analysts, that was leaked on Monday night. The secret report showed that Greece's debt burden could easily still stagnate at an unsustainable 160 per cent of GDP at the end of the decade if the economy does not return to growth quickly.

Analysts also expressed doubts over whether the Greek government would be capable of delivering the austerity measures that have been demanded by Greece's European creditors in exchange for the new bailout funds. Chris Towner from currency specialist HiFX said: "The reality of spending cuts will not go away for decades. The Greek people may take their destiny into their own hands through the democratic process." Greece is due to hold parliamentary elections in April. Support for the two main parties in the coalition – New Democracy and Pasok – hit an all-time low this week.

The deal signing off on Greece's new bailout was agreed after 14 hours of intense negotiations between finance ministers. Private sector bondholders will take a larger than expected 53 per cent write down on the value of the investments, giving Athens around €107bn in debt relief. The European Central Bank will forgo the profits on its holdings of Greek bonds and send them to Athens, which should ease Greece's debt burden by around €15bn. National central banks will also make a contribution through sending any profits on their own holdings of Greek bonds to Athens.

The interest rate that Greece pays on its loans from the European bailout fund, the European Financial Stability Facility, will also be cut.

For its part, Athens will push through further spending cuts of €3.3bn in 2012, amounting to 1.5 per cent of annual GDP. Greece will also be required to establish a special account, which will set aside the funds that the country needs to pay its creditors every three months. A new law will prioritise repayments to creditors above spending on social services. Greece will also accept an "enhanced and permanent" presence on the ground of European Commission inspectors, who will monitor whether the government is delivering on its fiscal commitments.

The deal still needs to be ratified by national parliaments. A key test will be the German parliament, which is expected to vote on the package next week. Another hurdle is the agreement of private sector bondholders. It remains to be seen what proportion of them will accept the "voluntary" bond swap negotiated on their behalf by the banking lobby group, the Institute of International Finance.

Santander may have rating cut

High street bank Santander is to have its long term debt and deposit ratings reviewed.

Investors were alerted to the possible downgrade by Moody's, the credit ratings agency, yesterday. Moody's said it did not expect Santander UK to be downgraded by "more than one notch" and its short term rating is not affected.

Santander UK was fined £1.5m by the FSA on Monday for failing to make it clear to investors who bought its structured investment products whether they were covered by the Financial Services Compensation Scheme.

The FSA said that despite the fact that Santander received many queries from its customers, it did not clarify the position until early 2010.

At a glance: The agreement

Greek government

* €3.3bn of public spending cuts.

* Athens-based European taskforce to monitor austerity measures.

* Special account giving priority to creditors over social services.

Eurozone governments

* Pay €130bn in bailout money to save Greece from bond default.

* Agree to forgo profits on Greek bonds and future central bank profits on bonds to be returned.

Banks and hedge funds

* 53 per cent write-down on the value of Greek debt holdings.

* Interest rate on Greek debt cut from 4.8 per cent to 3.65 per cent.

* Repayment dates extended to up to 30 years.

In numbers: The Greek economy

€350bn Approximate total of Greece's debt – more than 160 per cent of the country's annual economic output

€3.3bn Package of spending cuts Greece must stick to this year under the conditions of the bailout, one third of which will come from health budgets

€23bn Proportion of the bailout fund that will help to recapitalise Greek banks. Hardly any of the cash will go directly towards helping the economy

20.9% Rate of Greek unemployment

40.8% Rate of youth unemployment

5,000 Number of calls to the Athens suicide telephone hotline last year (twice the number received in 2010)

27.7 The percentage of Greeks at risk of falling below the poverty line

€751 Minimum monthly wage, which the government must commit to cutting by 22 per cent

32% Cut in minimum wage for under-25s that government must commit to for bailout funds to be released