The Second Economic Adjustment Programme for Greece, usually referred to as the second bailout package or the second memorandum, is a memorandum of understanding on financial assistance to the Hellenic Republic in order to cope with the Greek government-debt crisis.
It was signed on 1 March 2012 by the Greek Government under then-prime minister Lucas Papademos on one hand, and on the other hand by the European Commission on behalf of the Eurogroup, the European Central Bank (ECB) and the International Monetary Fund (IMF).
The second bailout package expired on 30 June 2015. It was superseded by the Third Economic Adjustment Programme for Greece.
History
Early draft (July 2011)
On 21 July 2011, 17 leaders of Euro countries, meeting at an EU summit, approved a preliminary draft of a second bailout package for Greece to address the limitations of the First Greek bailout package. The second bailout package would take the form of an €110bn aid package provided by the newly created European Financial Stability Facility. The repayment period was extended from seven to 15 years and the interest rate was lowered to 3.5%.
For the first time, this also included a Private Sector Involvement (called a PSI), meaning that the private financial sector accepted a "voluntary" haircut (finance). It was agreed that the net contribution of banks and insurance companies to support Greece would include an additional €37bn in 2014. The planned purchase of Greek bonds from private creditors by the euro rescue fund at their face value will burden the private sector with at least another €12.6bn.
It was also announced at the EU summit, a reconstruction plan for Greece in order to promote economic growth. The European Commission established a "Task Force for Greece".
EU summit (26 October 2011)
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. The second decision was to leverage the EFSF from €500bn to €1 trillion, as a firewall to protect financial stability in other Eurozone countries with a looming debt crisis. The leverage had previously been criticized from many sides, because it is something taxpayers ultimately risk to pay for, because of the significantly increased risks assumed by the EFSF.
Furthermore, the Euro countries agreed on a plan to cut the debt of Greece from today's 160% to 120% of GDP by 2020. As part of that plan, it was proposed that all owners of Greek governmental bonds should "voluntarily" accept a 50% haircut of their bonds (resulting in a debt reduction worth €100bn), and moreover accept interest rates being reduced to only 3.5%. At the time of the summit, this was at first formally accepted by the government banks in Europe. The task to negotiate a final deal, also including the private creditors, was handed over to the Greek politicians.
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. After two days of intense pressure, particularly from Germany and France, he finally gave up on the idea. On 11 November 2011 he was succeeded as prime minister by Loukas Papademos, who was to lead a new transitional government. 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).
One of the German EFSF-leverage critics, Fabian Lindner, then likened the austerity pressure Greece was feeling to the attitude the US exercised over Germany in 1931. 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.
Final agreement (February 2012)