Greece Seals Debt Exchange, Averts Imminent Default

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 eat into its mountainous public debt and clear the way for a new international bailout.

The finance ministry said creditors had tendered 85.8 percent of the 177 billion euros in bonds regulated by Greek law. This would reach 95.7 percent of all privately-held Greek debt with the use of "collective action clauses" to enforce the deal on creditors who refused to take part voluntarily.

Greece's international lenders, the European Union and International Monetary Fund, have demanded the bond swap as a condition for the 130 billion euro ($172 billion) bailout package, the country's second since 2010.

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

But Greece remains a long way from solving its daunting economic, political and social problems. Reforms demanded by the EU and IMF along with deep budget cuts have provoked serious violence in Athens and helped propel unemployment well over 20 percent as the nation suffers its fifth year of recession.

The country also faces elections in April or May when the pro-bailout conservatives and socialists face an array of smaller parties to the left and right that reject the rescue, and may struggle to form an effective government.

Traders priced in the profound doubts surrounding an overall programme which aims to cut Greece's debt from a towering 160 percent of its annual economic output now to a slightly more manageable 120 percent by 2020.

On the grey market, they indicated prices far below the face value of new bonds which will be issued to creditors on Monday.


Nevertheless, the bond swap went down well in EU capitals as the bloc tries to protect far bigger economies with debt problems such as Italy and Spain.

"It's good news, its a good success," French Finance Minister Francois Baroin told RTL radio.

Germany's finance ministry said the take-up was "a big step on the path to stabilisation and consolidation of a sustainable level of debt, which gives Greece an historic opportunity".

Spanish and Italian bond yields fell following the Greek announcement. However, those on debt issued by Portugal, which has also been bailed out by the EU and IMF, rose as investors looked for the euro zone's next weakest link.

Under the biggest sovereign debt restructuring in history, Greece's private creditors will swap 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 percent on the value of their investments, slicing more than 100 billion euros off Greece's crippling public debt.

The Institute of International Finance, the bank lobby that negotiated on behalf of Greece's private creditors, said the deal would help not only Greece but the wider euro zone.

"The very strong and positive result provides a major opportunity now for Greece to move ahead with its economic reform program, while strengthening the Euro Area's ability to create an economic environment of stability and growth," said IIF Chairman Josef Ackermann, who is also Deutsche Bank's chief.

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 (CACs) on the bonds regulated under Greek law. It will not be so easy to force holders of bonds governed by foreign laws to come to the table.

Using the CACs is likely to 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 1300 GMT to decide whether Greek credit default swaps will pay out.

"It almost now certainly going to trigger CDS. If this doesn't trigger it, nothing will," said Nick Stamenkovic, a bond strategist at RIA Capital markets in Edinburgh.


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 percent 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 14.5 billion euros of bond repayments are due, which it cannot hope to repay alone.

Markets showed investors have no faith that the bond swap will draw a line under the country's troubles. Under Greece's austerity and reform programme, its debt burden in 2020 should be proportionately similar to that at the moment of Portugal, which has also received an EU/IMF bailout.

This means yields on Greek and Portuguese bonds should be similar, provided investors believe Athens will meet its debt target. This was not the case on the grey market, with yields at 17-21 percent, far above Portuguese levels around 11-14 percent.

"The market is pricing a high risk premium which reflects uncertainty over upcoming elections in Greece and reform implementation risk," said on Athens dealer.

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.

"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 Tokyo.

Support for the two parties that back the bailout - those in the current coalition of technocrat Prime Minister Lucas Papademos - remains low. A poll last Saturday showed support for the conservative New Democracy party fell to 28 percent from 31 percent in a previous poll earlier in the month, while the Socialist PASOK party recovered part of its previous losses, with its ratings at 11 percent from 8 percent.

"After the elections, no matter when these will take place, we have a government of authority, determined to walk the difficult path of reforms. Otherwise, all sacrifices that were made will be wasted," said the Athens financial daily Imerisia.

Resentment has grown 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.

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