Greece clinches debt deal; way clear for bailout

March 09, 2012 - 10:05:01 pm


Greek Finance Minister Evangelos Venizelos (centre) addresses reporters as Economic Advisor George Zanias (right) and Deputy Finance Minister Filippos Sachinidis look on in Athens yesterday.

ATHENS: Greece took a critical step to avoid bankruptcy with a debt write-off deal yesterday and the head of eurozone finance ministers said a second bailout is on track.

This means that Greece is now placed to repay debt soon due and has a second chance to rebuild its shattered economy, and that the eurozone is spared default chaos which would have destabilised global markets.

European Union officials welcomed the debt swap with relief but financial analysts warned that the Greek problem is contained not buried.

“The Eurogroup considers that the necessary conditions are in place to launch the relevant national procedures required for the final approval of the euro area’s contribution to the financing of the second Greek adjustment programme,” the head of Eurogroup eurozone finance ministers Jean-Claude Juncker said.

Eurozone finance ministers held a conference call on Friday and are due to meet on Monday in Brussels.

EU Economics Affairs Commissioner Olli Rehn said the result of the swap offer was a “decisive contribution to financial stability in the euro area as a whole.”

The head of the International Monetary Fund Christine Lagarde said in Washington: “This is an important step that will dramatically reduce Greece’s medium-term financing needs and contribute to debt sustainability.”

Germany’s finance ministry said that Greece had been handed a “historic chance” and France’s Finance Minister Francois Baroin hailed the “good news” for Greece.

A broad majority of private holders of Greek debt agreed to cancel half the money owed to them, enough to trigger the swap.

Greek officials said the swap would shave around ¤100bn ($132bn) off its total debt of roughly ¤350bn, which is around ¤7bn short of the target.

Nevertheless, Greece’s eurozone partners are likely to go ahead with a second bailout worth up to ¤130bn in fresh loans.

The successful debt swap was a key condition of the bailout, with Greece’s parliament having already approved a raft of required measures to balance the budget and liberalise the economy.

The swap announcement came shortly before official data showed that the Greek economy, in deep recession, has shrunk at a faster rate than thought.

The state statistics agency said the economy had contracted by 7.5 percent in the fourth quarter of 2011, revising a previous 7.0-percent estimate.

On an annual basis, this meant output shrank by 6.9 percent compared to a previous forecast of 5.5 percent.

The high level of acceptance of the swap terms is in line with a critical test for the EU and IMF to push on with a far bigger bailout for Greece, and Athens said it would now mop up remaining bonds affected by the exchange in the next two weeks.

“Seven billion euros remain in reality,” Greek Finance Minister Evangelos Venizelos told a news conference, a few hours after the finance ministry said creditors had tendered bonds amounting to 83.5 percent of debt covered by a deal to cancel more than half the amount owed.

On the basis of full acceptance, Greece would secure a write-off worth 107 billion euros to put it on track to reducing its debt to the sustainable level of roughly 120 percent of annual output by 2020.

Venizelos said all bonds issued under Greek law had been accounted for by virtue of legislation — known as collective action clauses — which now enable Greece to force compliance on all investors based on the majority decision to participate.

Holders of bonds issued under foreign law, and of bonds issued by state companies guaranteed by Greece, will be given until March 23 to decide, the minister said, warning that investors would be “naive” to expect a better offer.

The success of the debt swap is a vital step for Greece to be able to avoid a default as early as March 20 when it has to repay some debt. Default would be catastrophic for Greece and could cost the eurozone one trillion euros and send shockwaves around global financial markets.

Stocks in Tokyo closed at the highest level in seven months. European shares were mostly unchanged a day after sharp rallies on anticipation of the deal. The euro eased.

Anita Paluch, a trader at Gekko Global Markets in London reflected a widespread analyst view: “It (is) not that all the problems are gone, as this is just the beginning of the road to recovery.”