Greece secures debt swap and escapes default

Greek soldiers Athens, undated.[Shutterstock]

Greek soldiers. Athens, undated. [Shutterstock]

Greece claimed a major success for its bond swap offer to private creditors today (9 March) after it won heavy acceptance for a deal that averts the immediate risk of an uncontrolled default on its massive public debt.

The finance ministry said 85.8% of its €177 billion in bonds regulated under Greek law had been tendered, adding that the rate would reach 95.7% 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 €130 billion bailout package agreed with Greece last month.

Government spokesman 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.

The biggest sovereign debt restructuring in history will see bond holders accept losses of some 74% on the value of their investments in a deal that will cut more than €100 billion from Greece's crippling public debt.

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 on all its bondholders, activating the collective action clauses on the bonds regulated under Greek law.

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 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," it added.

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 the second world war and crushed under debt equal to 160% of its gross domestic product.

Athens must have the funds in place by March 20 when some €14.5 billion 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.

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.

Greek Finance Minister Evangelos Venizelos said in a statement after the deal was announced: "On behalf of the Republic, I wish to express my appreciation to all of our creditors who have supported our ambitious programme of reform and adjustment and who have shared the sacrifices of the Greek people in this historic endeavour.  With the support of our official sector and private creditors, Greece will continue implementing the measures needed to achieve the fiscal adjustments and structural reforms to which it has committed, and that will return Greece to a path of sustainable growth."

European Parliament President Martin Schulz welcomed the agreement between Greece and its investors. "The agreement is a major step towards bringing Greek debt to sustainable levels and towards restoring stability in the eurozone. A successful bond swap agreement is a pre-condition for final approval of the second €130 billion aid package for Greece agreed last month."

Commission Vice-President Olli Rehn welcomed the positive turnout of the voluntary debt exchange in Greece saying that "contribution by the private sector is an indispensable element to ensure future sustainability of the Greek public debt and, thus, a decisive contribution to financial stability in the euro area as a whole."

"I now expect the Greek authorities to maintain their strong commitment to the economic adjustment programme and to rigorously and timely implement the policy package. This second programme is the corner stone of our efforts to boost sustainable growth and jobs in Greece."

Eurozone finance ministers agreed a €130 billion rescue plan for Greece on 21 February to avert an imminent chaotic default after forcing Athens to commit to unpopular cuts and private bondholders to take bigger losses.

The bailout will resolve Greece's immediate financing needs but seems unlikely to revive the nation's shattered economy, which has been in recession for five consecutive years.

Under the agreement, Greece will be placed under permanent surveillance by an increased European presence in Athens, and it will have to deposit funds to service its debt in a special "escrow account" to guarantee repayments.

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