The European leaders decided on an appropriate plan to give financial stability to the Euro area and ease concerns around Greece’s debt issues. The current package will give Greece more time to pay back the loans with the minimum term on the rescue loans extended from 7.5 years to 15 years. The longer term comes with lower interest rates of around 3.5%, significantly lower than the current government bond yield at 8.3%, which will give Greece a better chance of being able to re-establish a more robust fiscal position. It has taken sometime for the European leaders to agree on a suitable bailout package for the Euro area but it should come as no surprise that Greece is in trouble with its finances again.
Reinhart and Rogoff point out in their book “This Time is Different” (2009) that this isn’t the first time Greece has defaulted. Since 1800 Greece has defaulted 5 times and spent over 50 years in either default of rescheduling. It is keeping company with countries such as Ecuador (58.2 years in default), Nicaragua (45.2), and Cote d’Ivoire (48.9) amongst others. The people of Greece will face significant changes as the country tries to fix its chronic debt problems.
While this package alleviates any immediate concerns around the financial stability of the Euro area, it is effectively kicking the can down the road, buying a little time but not addressing the issue at hand. We will continue to closely monitor the situation and what it means for global markets and economies.