Following a 12-hour Eurogroup meeting in Brussels on November 26/27, eurozone FinMins and the IMF reached the long-awaited agreement on Greece including debt buyback, significant extension of maturities, reduction of interest rates, deferral of interest payments and return of SMP profits to Greece resulting in a reduction of the estimated debt-to-GDP ratio by 20 percentage points to 124% (from 144%) in 2020 and further to substantially below 110% by 2022.

Furthermore, Eurogroup decided that the necessary elements are now in place for eurozone countries to launch the relevant national procedures required for the approval of the next EFSF disbursement, which amounts to €43.7bn, out of which €34.4bn will be paid out in December. The disbursement of the remaining amount of €9.3bn will be made in three tranches during Q1’13 subject to the implementation of the MoU milestones to be agreed by the troika.

Overall, a very positive development for Greece reaffirming European partners’ commitment and alleviating the prevailing uncertainty over the past few months, while giving the country another chance of getting out of the recession and over-indebtedness. Nevertheless, there are several issues pending clarification particularly regarding the implementation of debt buyback and the impact of its potential outcome on debt reduction measures, as well as the conditionality and the segregated account. The ball is returning again to the Greek court and, after taking a deep breath, the government should stick to the ongoing fiscal consolidation and the implementation of reform measures, while at the same time improving confidence and ultimately restoring growth.

We summarize below the key elements of the Eurogroup decisions on Greece:

• The Eurogroup concludes that the necessary elements are now in place for Member States to launch the relevant national procedures required for the approval of the next EFSF disbursement, which amounts to €43.7bn, out of which €34.4bn, €10.6bn for budgetary financing and €23.8bn in EFSF bonds earmarked for bank recapitalisation, will be paid out in December. The disbursement of the remaining amount (€9.3bn) will be made in three sub-tranches during the first quarter of 2013, linked to the implementation of the MoU milestones (including the implementation of the agreed tax reform by January) to be agreed by the Troika.

• The Eurogroup expects to be in a position to formally decide on the disbursement by December 13, subject to the completion of these national procedures and following a review of the outcome of a possible debt buy-back operation by Greece.

• The Eurogroup was informed that Greece is considering certain debt reduction measures in the near future, which may involve public debt tender purchases of the various categories of sovereign obligations. If this is the route chosen, any tender or exchange prices are expected to be no higher than those at the close on November 23. The details of the buyback program regarding are still unclear. It is noteworthy that the implementation of debt buyback is prerequisite for debt reduction measures as well as for a positive recommendation of Christine Lagarde to the IMF Executive Board.

• With a positive outcome of the possible debt buy-back operation, the euro area Member States would be prepared to consider the following initiatives:

1. An extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years.
2. A lowering by 100bps of the interest rate charged to Greece on the loans provided in the context of the Greek Loan Facility (i.e. €53bn). Member States under a full financial assistance program are not required to participate in the lowering of the GLF interest rates for the period in which they receive themselves financial assistance.
3. A commitment by Member States to pass on to Greece’s segregated account, an amount equivalent to the income on the SMP portfolio accruing to their national central bank as from budget year 2013.
4. A lowering by 10bps of the guarantee fee costs paid by Greece on the EFSF loans.

• Euro area Member States will consider further measures and assistance, including inter alia lower co-financing in structural funds and/or further interest rate reduction of the Greek Loan Facility, if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the program, in order to ensure that by the end of the IMF program in 2016, Greece can reach a debt-to-GDP ratio in that year of 175% and in 2020 of 124% of GDP, and in 2022 a debt-to-GDP ratio substantially lower than 110%.

• Greece will transfer all privatizations revenues, the targeted primary surpluses as well as 30% of the excess primary surplus to the segregated account to meet debt service payment on a quarterly forward-looking basis.

• The Eurogroup stresses, however, that the above-mentioned benefits of initiatives by euro area Member States would accrue to Greece in a phased manner and conditional upon a strong implementation by the country of the agreed reform measures in the program period as well as in the post-programme surveillance period.

• The Eurogroup considers that, in recapitalising Greek banks, liability management exercises should be conducted in respect of remaining subordinated debt holders so as to ensure a fair burden sharing.