Bailout deal means more pain for Greece

— -- The new deal to bail out Greece a second time will force banks and other private creditors to write off more than half of what they're owed and slash interest rates on the rest — but still won't be enough to rescue Europe's most financially strapped country from years of grinding recession.

Officials of the European Union, private creditor groups and the International Monetary Fund defended the latest debt-restructuring deal Tuesday, as critics said Greece's fast-shrinking economy will shrivel even faster under the austerity the EU demanded in exchange for contributing 130 billion euros ($172 billion) through 2014 to the deal. Those terms call for Greece to cut its budget for defense, state-employee pensions and other expenses, and to slash its minimum wage and reduce the ranks of public employees, who now are 40% of all Greeks working.

The deal sets off a race between the downward spiral of Greece's economy and hope that lower debt payments and better access to credit for Greek companies will kick-start private-sector growth. Greece's economy is expected to shrink 6.5% this year, says IHS Global Insight, while the deal shaves about $20 billion a year from interest and principal payments through 2020. The key is if growth resumes before Greeks are exhausted by years of deprivation and demand change, said Diego Iscaro, an IHS economist in London.

"I don't think this is going to solve anything," Iscaro said. "Not only do they not have a strategy for growth, it doesn't look like they've even thought about it."

How it works

The biggest change the deal makes is that Greece will refinance all of the 206 billion euros ($273 billion) it owes to private-sector creditors, said Frank Vogl, a spokesman for the Private Creditor-Investor Committee for Greece, which represents most of Greece's private lenders.

Holders will have the right to exchange existing bonds for 70 billion euros of new debt from Greece and 30 billion euros in government notes backed by a eurozone bailout fund, in a deal expected to happen by the middle of March, he said. Private debt would be reduced by 107 billion euros.

The new bonds will initially pay just 2% interest, far below the market rate on Greek debt now, Vogl said. Combined with other concessions, the package cuts the value of Greece's 206 billion euros in private debt by more than 70%, he said. The rest of Greece's debt, 144 billion euros owed to public entities such as the European Central Bank, is not affected by this deal.

The deal still has to be approved by some European parliaments, and Greece's legislature must pass implementing legislation, Vogl said. Enough private-sector investors also must agree to the bond swap. The IMF said it will decide how much it will contribute to the package after those steps are completed.

"It's a huge reduction of their debt burden and a huge boost to Greece's cash flow," Vogl said. "The program is very tough. Hopefully, their sacrifices will be worthwhile."

Why it might not work

Yet the deal contains few provisions to stimulate Greece's major export sectors or boost tourism, another area where Greece gets foreign exchange, said Eswar Prasad, an economist at Cornell University.