GREECE is expected to be placed on "selective default status" soon by all three rating agencies after European leaders reached agreement on a new bailout plan for the debt-crippled nation, a senior euro-zone official said today.
"This is the expectation among all euro-zone leaders. They have decided to accept this risk after assurances by the European Central Bank that it will continue to accept Greek bonds as collateral despite the default status," the official who participated in the summit talks said.
"Private holders will be hit by losses regardless of what option they choose, and this is default. The expectation is that the contagion effect will be limited because the ECB has decided to bend its rules on Greece. But nobody really knows how the market will react," the official added.
Euro-zone leaders agreed today on a second rescue package for Greece to fully cover its financing gap.
Official financing will amount to 109 billion euros ($145bn) while the net contribution from the private sector will be an estimated 37bn euros.
Euro-zone leaders said in a statement that private bondholders were given a "menu of options" to voluntarily participate in the Greek bailout.
The contribution of 37bn euros will come from swaps of existing bonds with new ones that have longer maturities. Another 12.6bn euros will come from bond buybacks.
"There was nothing really voluntary in this exercise," the official said.
The maturity on aid loans to Greece from the euro-zone emergency lending vehicle, the European Financial Stability Facility, will also be extended to a minimum of 15 years and a maximum of 30 years, with a grace period of 10 years.
Greek Prime Minister George Papandreou said: "We now have a program and a package of decision which create a sustainable path for Greece."
He said the Greek government is committed to implementing macroeconomic reforms to meet the requirements of its financing package.
He added that the decision today send "a very strong message of support to the banking system".
Leaders added that private sector involvement will be limited to Greece.
European Commission president Jose Manuel Barroso said it is "crystal clear" that private sector involvement is a unique solution for Greece.
The head of the International Monetary Fund welcomed the financing deal meant to stem a European sovereign-debt crisis, indicating it was enough for the fund to approve an expanded program for Greece.
"The IMF welcomes the important steps taken today by the leaders of the euro zone and the EU institutions.
These measures provide significant support to growth and financial stability in Greece and in the euro zone," Christine Lagarde, the new IMF managing director said in a statement after European leaders announced a new strategy to solve the euro-zone's financial crisis.
"Based on strong implementation of the program by the Greek authorities, and the determination by member states to support Greece, the IMF will continue to play its part in line with Fund policies and, of course, subject to the approval by our Executive Board," she said.
There's been a growing urgency among world leaders that Europe must overcome its political differences and solve its debt crisis before it spirals into another global financial meltdown.
Fears that the debt crisis may engulf Europe's fourth largest economy, Italy, has accelerating concerns that months of bickering between European officials is on the brink of pushing the euro zone plight into a far more damaging stage.
The Australian
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