Eurozone approves new $173B bailout for Greece

By Kevin Voigt, CNN
updated 11:30 PM EST, Mon February 20, 2012

(CNN) -- Eurozone finance ministers sealed a deal Tuesday morning for a second bailout for Greece, including €130 billion ($173 billion) in new financing.

The finance ministers from the 17 nations that use the euro, known as the Eurogroup, gave Greece funding it needs to avoid a potential default next month.

While this new deal provides some short-term relief for Greece, difficult days lie ahead as the government tries to trim debt to 121% of the country's gross domestic product by 2020. Greece's debt now stands at about 160% of GDP.

An austerity pact was approved by the Greek parliament on February 12, leading to some of the worst riots in the country in recent years. The package, which included deep cuts in government spending, wages and pensions, helped pave the way for eurozone finance ministers to sign off on the new €130 billion ($172.6 billion) bailout deal.

Behind the Greek bailout negotiations
"This certainly removes some near-term risk," said Frederick Neumann, senior economist for HSBC in Hong Kong. "I think it's clear that questions will emerge whether Greece can stomach these cuts."

'Not the right agreement' for Greece
Greece has also hammered out a plan to write down €100 billion euros worth of Greek government bonds and swap existing debt for securities with lower interest rates, a deal that would result in losses of 53.5% for the private sector.

Borg: More steps needed on bailout deal
"There are details to be worked out big work is done now, I think that will provide relief to financial markets," Neumann said. "But it's difficult to see this turning around the Greek economy coming anytime soon."

Surrender of Greek sovereignty?
Greece is in its fifth year of recession, and the government reported last week that Greece's GDP, the broadest measure of a nation's economic output, fell 6.8% last year.

That's much worse than the 6% contraction the government originally predicted. Fourth-quarter GDP also continued to decline, shrinking 7%, compared with a 5% decrease in the third quarter.

While Greek economy is small compared to other eurozone countries -- "about the size of Connecticut compared to the rest of the United States," Neumann said -- the real threat is keeping the debt crisis and borrowing costs from spiraling to larger economies in the eurozone. A default by Greece could spark "a Lehman-like event," referring to the collapse of the investment bank that catalyzed the 2008 financial crisis.

"I think we understand these issues much better than we did three years ago," Neumann said. "Kicking these issues down the road has been useful to some extent" because a default would be less likely to take the markets by surprise, he added.

"The next hurdle is to create a firewall to put up sufficient money to know that Ireland and Portugal won't be next," Neumann said. "This today is really short-term relief, but we'll probably be looking at these issues (at) some point."

There has been some speculation that Greece might exit the eurozone, but Eurogroup president Jean-Claude Juncker stressed ahead of Monday's meeting that Greece should remain a member of the euro currency union.

"It is the intention of nobody to have Greece outside of the eurozone," he said. "That would be a bad solution for Greece and ... a bad solution for the euro area."

Eurozone approves new $173B bailout for Greece - CNN.com