Greek Bailout by Eurozone: All for One, One for All

In a historic move, the Eurozone today decided to write-off 50% of Greek debt as part of its Financial stability measure, a key objective of the Eurozone. In a move to avoid the almost certain prospect of national bankruptcy, the Eurozone decided to undertake the exceptional measure, to protect the Euro.

The IMF and the Eurozone will extend a bailout of 100bn Euros by the end of 2011. The members of the Eurozone arrived at this decision after discussion with banks. The discussion led to the conclusion that European banks require to have reserves of 9% of their assets.

The real question playing on everyone’s mind is if Greece has done enough in terms of reforms to reduce its budget deficit, for this rescue plan to have a positive impact. This bailout package comes out at the back of the Austerity Bill passed by the Greek Parliament.

The 50% write off stands largely on private investors, in return for a payout of 30bn Euros. These 30bn Euros will come partly from the European Financial Stability Facility and from the proceeds of the sale of State assets by Greece.

France and Germany are exposed at 56.7% and 33.9 % to Greek debt (Source: BBC). A Greek default would mean a domino effect on the rest of the Eurozone. The bailout package is as important to other members of the Eurozone as it is for Greece in the long term. The Eurozone desperately wants to prevent the fires of financial crisis from spreading across other member states. It also hopes it will reinstate investor confidence. The bail-out also signals more surveillance of Greece by the Eurozone.

George Papandreou, the Greek prime minister, said, “We now have the chance to settle our accounts with the past once and for all, to be relieved of our burden and to enter a period of growth. It’s a new beginning for us, but the work must not stop.”

The prospect of nationalizing some of the worst hit private sector banks is very real. The bailout is not a permanent solution, but hopes to buy more time for Greece to set its house in order and most certainly avert bankruptcy. The pace and seriousness with which Greece implements its austerity plan, will determine if Greece has learned from its past and utilized the bailout effectively.