Admit it, on some level you were missing European debt drama. Every morning you could wake up, get a cup of coffee, check the market news, and then completely panic about the future of humanity, thus were the halcyon days of late 2011. Well, for those feeling nostalgic, the most recent bout of troubles involving Greece's struggles to come to an agreement that would allow eurozone members to sign off on the most recent installment of bailout funds have been nice.
However, news from Greece appears to increasingly point towards parties there reaching a deal in the near future. Greek Prime Minister Lucas Papademos began negotiations Wednesday on a draft deal for a debt plan that would release bailout funds to his country and prevent default.
It's All Greek
The deal that the Greek government appears poised to reach is complicated, but it's also viewed as essential to avoiding a default on Greek debt that could throw Europe into further chaos. Greece needs to build political support at home for austerity measures that are being required by eurozone countries before the next round of bailout loans, these totaling $170 billion, is released to Greece.
A key change that has given investors hope that Greece will reach a deal came when the European Central Bank (ECB) agreed to transfer its $53.156 billion worth of Greek bonds to the European Financial Stability Facility (EFSF). Getting holders of Greece's $265.8 billion in privately held debt to accept a 50-percent writedown has been a major sticking point, but it's also seen as an essential step in preventing bankruptcy. Greece currently has debt exceeding 160 percent of its economic output, and the write down would offer a chance to lose some $133 billion of its $465 billion total debt. However, the ECB, one of the largest single holders of Greek notes, was unsure if it could accept the loss of profit on its bonds, which would be worth $73 billion if allowed to mature.
Painful Cuts for Greeks and Bondholders Alike
While getting the rest of Europe to agree to the plan has been difficult enough, Greek politicians have also been dragging their feet on enacting painful austerity measures required by the eurozone, particularly with national elections most likely to occur within months. The new deal includes almost $4 billion more in cuts as well as a 20-percent reduction in the minimum wage. However, markets appeared relatively optimistic that a deal would get done despite the distress it will cause all parties involved as the only other option appears to be bankruptcy. Papademos now needs to get the leaders of the other two major parties in Greece to accept these painful reforms in order to secure the bailout funds and avoid default.
Market reaction appeared mixed to the news, rising at market open only to fall in the late morning and then rally as the afternoon wore on. The Dow Jones is up only slightly while the S&P 500 and Nasdaq both had gains under a half percent. Among the benefactors of the rumors that Greece was on the verge of a deal were major banks, with Bank of America (BAC) up over 3.5 percent, Deutsche Bank (DB) up over 3 percent, and Citigroup (C) is up over 3.5 percent.
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