Second Economic Adjustment Programme for Greece

[6] On the night of 26 to 27 October at the EU summit, the politicians made two important decisions to reduce the risk of a possible contagion to other institutions, notably Cyprus, in the case of a Greek default.

The first decision was to require all European banks to achieve 9% capitalization, to make them strong enough to withstand those financial losses that potentially could erupt from a Greek default.

In view of the uncertainty of the domestic political development in Greece, the first disbursement was suspended after Prime Minister George Papandreou announced on 1 November 2011 that he wanted to hold a referendum on the decisions of the Euro summit.

The most important task of this interim government was to finalize the "haircut deal" for Greek governmental bonds and pass a new austerity package, to comply with the Troika requirements for receiving the second bailout loan worth €130bn (enhanced from the previously offered amount at €109bn).

In that earlier circumstance, the collapse of an Austrian and then a German bank followed, leading to a worsening of the Great Depression, political change and ultimately war.

The first requirement was to finalize an agreement whereby all private holders of governmental bonds would accept a 50% haircut with yields reduced to 3.5%, thus facilitating a €100bn debt reduction for Greece.

The third and final requirement was that a majority of the Greek politicians should sign an agreement guaranteeing their continued support for the new austerity package, even after the elections in April 2012.

In a thirteen-hour marathon meeting in Brussels, EU Member States agreed to a new €100 billion loan and a retroactive lowering of the bailout interest rates to a level of just 150 basis points above the Euribor.

[18] In case not enough bondholders agree to a voluntary bond swap, the Greek government threatened to and did introduce a retroactive collective action clause to enforce participation.

[19] The cash will be handed over after it is clear that private-sector bondholders do indeed join in the haircut, and after Greece gives evidence of the legal framework that it will put in place to implement dozens of "prior actions" - from sacking underproductive tax collectors to passing legislation to liberalise the country's closed professions, tightening rules against bribery and readying at least two large state-controlled companies for sale by June.

It will also have to service its debts from a special, separate escrow account, depositing sums in advance to meet payments that fall due in the following three months.