Before you start
What you'll be able to answer
- Why did private holders of Greek bonds take a cut in 2012?
- How did the bond exchange work, and what came with it?
- What did the exchange do to Greek debt?
Where this sits
The Eurozone Crisis — 2009 to 2015 · this module is lit
- 21 Oct 2009Greece revises its 2009 deficit figure sharply upward
- May 2010Euro area governments and the IMF agree Greece's first rescue loan, EU governments agree to create rescue funds, and the ECB starts buying government bonds
- 28 Nov 2010Ireland agrees a rescue programme
- May 2011Portugal agrees a rescue programme
- Dec 2011 and Feb 2012The ECB makes two rounds of three-year loans to banks
- Mar to Apr 2012Private holders of Greek bonds take a cut of more than half in face value
- 20 Jul 2012Euro area ministers approve a loan to rebuild the capital of Spain's banks
- 26 Jul and 6 Sep 2012The ECB's president promises "whatever it takes"; the ECB announces a plan to buy struggling governments' bonds
- Mar to Apr 2013Cyprus takes rescue loans, while uninsured depositors, shareholders and bondholders meet the capital needs of Cyprus Popular Bank and the Bank of Cyprus
- Jun to Jul 2015Greece shuts its banks as savers rush to withdraw money, voters reject the lenders' terms, and euro area leaders agree to move towards a third programme
Luxembourg, June 2011
On 20 June 2011 the finance ministers of the euro area, the countries that share the euro, met in Luxembourg. Since May 2010 Greece had lived on rescue loans from euro area governments and the International Monetary Fund (IMF), which lends to countries in trouble. The ministers now said Greece "is unlikely to regain private market access by early 2012": when the rescue money ran out, it could not go back to borrowing from investors.
Greece would need more money than its first rescue provided. Where could it come from?
More loans from euro area governments and the IMF. The finance ministers expected that Greece could not borrow from investors; Greece's banks had been losing deposits, the IMF later found; and sales of state assets, which were meant to help, were coming more slowly than planned, the European Commission, the EU's executive, said in 2012. The open question was what the private holders of Greek bonds would give up in return.
Greece still could not borrow, 2011
Greece's first rescue had not restored lenders' trust. Its government debt, as a share of its yearly output, its GDP, rose from 147.8 per cent in 2010 to 175.1 per cent in 2011, according to Eurostat, the EU's statistics office. In October 2011 Greece's government said it would miss its targets for 2011 and 2012 for the deficit, the gap between what the government spends and what it collects.
Governments borrow by selling bonds, promises to repay with interest. A bond's face value is the amount it promises to repay at the end. Euro area leaders accepted that Greece needed a second rescue.
The leaders' choice, October 2011
In July 2011 euro area leaders had agreed to start talks on a second rescue for Greece and had backed an approach in which the banks and other investors holding Greek bonds would take part, called "voluntary"; talks on its form were still going on. Each way of involving the holders had a case and a cost. Leaving them alone would protect banks and keep lenders calm about other countries, but rescue money would go to repay them in full. Asking them to lend again of their own free will would avoid a default, a failure to repay, but leave the debt as large as before. Cutting what Greece owed would shrink the debt at once, but the president of the European Central Bank (ECB), the central bank for the euro area, Jean-Claude Trichet, thought such cuts dangerous if lenders came to see them as the rule.
Your decision
You are a euro area leader in October 2011. What do you ask of private holders of Greek bonds?
No holder loses money, so no bank takes a loss and no lender has a new reason to fear for other governments' bonds.
Where it was triedIn May 2010 euro area governments and the IMF lent to Greece without a restructuring, a deal that cuts what a borrower owes its lenders.
What it costsLeaders had said they did not want new rescue money simply to pay off the investors who held Greek bonds, and Greece's debt would not shrink.
Holders share the burden by rolling their loans over, and Greece is not declared in default.
Where it was triedIn June 2011 the euro area's finance ministers hoped for informal, voluntary roll-overs of this kind.
What it costsHolders are still owed the full amount, so the debt does not fall, and each holder can choose to stay out.
Cutting what Greece owes makes its debt smaller at once, so less new rescue money is needed later.
Where it was triedIn October 2010 the leaders of France and Germany agreed that private lenders to governments should share losses in future crises.
What it costsBanks holding Greek bonds take losses. The head of Deutsche Bank, Josef Ackermann, later warned that Europe would pay a high price for years.
Private holders would swap their Greek bonds for new ones with a lower face value, as part of a second rescue programme for Greece.
What followedTalks with the holders ran into 2012. The final terms, agreed in February 2012, cut a little more than half, and the exchange took place in March and April 2012.
The deal of February 2012
In October 2011 euro area leaders called for private holders of Greek bonds to take a cut of about half in face value. They had said they would not put new rescue money into Greece simply to pay off the investors who held its bonds. Greece's prime minister, George Papandreou, called a referendum on the plan, then dropped it and resigned; Lucas Papademos, a former vice-president of the ECB, took over in November.
On 21 February 2012 the euro area's finance ministers acknowledged the terms Greece had agreed with its private lenders, and said a successful exchange was a necessary condition of a second programme. They also noted that the euro area's central banks, the ECB among them, held their Greek bonds for public policy reasons. Those bonds were kept out of the exchange.