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Greece averts default with bond success

Athens - Greece averted the immediate risk of an uncontrolled default on Friday, winning strong acceptance from its private creditors for a bond swap deal which will ease its massive public debt and clear the way for a new international bailout.

The finance ministry said creditors had tendered 85.8% of the €177bn in bonds regulated under Greek law. That rate would reach 95.7% of all Greek debt with the use of “collective action clauses” to enforce the deal on creditors who refused to take part voluntarily.

The result should clear the way for the European Union and International Monetary Fund to release a €130bn bailout package agreed with Greece last month.

Government spokesperson Pantelis Kapsis said the result was a “vote of confidence” in Greece’s ability to carry out deep structural reforms to its stricken economy. “I think it’s a historic moment,” he told private television station Antenna.

“It’s good news, it's a good success,” French Finance Minister Francois Baroin told RTL radio. “It’s something that allows us to stay on a voluntary basis that avoids the risk of default.”

Under the deal, the biggest sovereign debt restructuring in history, creditors will exchange their old bonds for new ones with a much lower face value, lower interest rates and longer maturities. This means they will lose about 74% on the value of their investments but Greece’s crippling public debt will be cut by more than €100bn.

The deadline for acceptance of the offer for bonds governed by international law and for state-guaranteed bonds issued by public companies has been extended to March 23.

Athens confirmed it would enforce the deal, activating the collective action clauses on the bonds regulated under Greek law. It will not be so easy to force holders of bonds governed by international laws to come to the table.

That may trigger payouts on the credit default swap (CDS) insurance that some investors held on the bonds, an event which would have unknown consequences for the market.

The International Swaps and Derivatives Association said it will meet on Friday at 15:00 to decide whether Greek credit default swaps will pay out.

The Institute of International Finance, the bank lobby that negotiated on behalf of Greece’s private creditors, said: “The debt exchange results, and the associated unprecedented upfront nominal reduction in the privately-held Greek debt, will catalyse the ... official sector support for Greece’s new three-year reform programme.” 

Optimism

Despite the success, the deal will not solve Greece’s deep-seated problems and at best it may buy time for a country facing its biggest economic crisis since World War Two and crushed under debt equal to 160% of its gross domestic product.

Financial markets rose strongly in the run-up to the deadline, with global stocks enjoying their best day in more than two months on Thursday as the threat of an immediate and uncontrolled default receded. Given that rally, reaction was muted after Friday’s official announcement.

Athens must have the funds in place by March 20 when some €14.5bn of bond repayments are due, which it cannot hope to repay alone.

Greece has staggered from deadline to deadline since its crisis broke two years ago and several of its international partners have expressed open doubts about whether its second major bailout in two years will be the last.

Analysts were cautiously optimistic, but acknowledged the bond swap was unlikely to draw a line under Greece’s troubles.

“Even when a messy default is prevented, the upcoming election in Greece next month will be the next risk factor,” said Yuji Saito, director of the foreign exchange division at Credit Agricole Bank in Tokyod.

Tim Ghriskey, chief investment officer at Solaris Group in New York, said: “This does not mean the debt situation in Greece is resolved, and this is not the last time we will be hearing about this. But it is a relief that it didn’t go the other way. It could have been a lot worse.”

Underlining the severe problems facing Greece after five years of deep recession, data on Thursday showed unemployment running at a record 21% in December, twice the eurozone average, with 51% of young people without a job.

There has been growing resentment among ordinary Greeks over the austerity medicine ordered by international creditors which has compounded the pain from a slump which has seen the economy shrink by a fifth since 2008.

Support for the two parties backing technocrat Prime Minister Lucas Papademos remains low and prospects of a clear majority in the election are thin.
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