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Greece clinches largest sovereign debt overhaul in history

A European Union flag is seen in front of the Parthenon temple in Athens.


Greece's bond swap, the biggest sovereign debt overhaul in history, has succeeded, allowing the country to avoid a disorderly default and secure its second bailout.

The Greek government announced just after dawn, Athens time, that it had reached its bond-swap target with the private holders of Greek debt, which will see them trade their holdings for bonds with longer maturities and lower interest rates. The exercise is designed to eliminate more than €100-billion ($131-billion U.S.) of Greek debt.

Bonds worth €172-billion were tendered, bringing the participation rate to 83.5 per cent. That means the minimum threshold was set for Greece to trigger the collective action clauses (CACs) to force most of the rest of the investors into the deal. After that happens, the participation rate would rise to 95.7 per cent.

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In a statement, Greek Finance Minister Evangelos Venizelos said: "I wish to express my appreciation to all of our creditors who have supported our ambitious program of reform and adjustment and who have shared the sacrifices of the Greek people in this historic endeavour."

On Friday afternoon, the agency that oversees financial derivatives announced that the massive debt relief deal for Greece constitutes a so-called credit event, meaning it will trigger payouts on bond insurance.

The International Swaps and Derivatives Association said its determinations committee, meeting in London, "resolved unanimously that a Restructuring Credit Event has occurred with respect to The Hellenic Republic."

That means holders of credit default swaps (CDS) on Greek bonds will be able to claim insurance payments as a result of Greece's decision to force its debt holders into a bond swap.

There had been fears that the payout of such insurance could spark a cascade of losses for banks and other important investment funds.

But ISDA has said that overall payouts on CDS linked to Greek bonds will be less than $3.2-billion, relieving fears that they could fell a big financial firm.

Once the CACs are triggered, all of the €177-billion of bonds that were sold under Greek (as opposed to foreign) law will be swapped for a cash payment and lower-valued bonds. The process will eliminate 53.5 per cent of the face value of the old bonds, equivalent to a net present value loss of more than 70 per cent.

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As a result, the Greek national debt will fall to about €250-billion from €350-billion.

Athens announced that about €20-billion, or 69 per cent, of the bonds issued under foreign law were also tendered. The government is now giving the hold-outs of foreign-law bonds until March 23 to tender their holdings.

Greece has stated that it would not pay out any of the holders of the foreign bonds, many of which are assumed to be owned by hedge funds. The likelihoods of lawsuits from the hedge funds are high. Argentina's default on its debt a decade ago triggered years of litigation between the government and bondholders who demanded full payouts.

According to the Financial Times, the new Greek bonds are already trading at distress levels, suggesting that investors are not convinced Greece can avoid a default, or another debt restructuring, some time in the future. Pricing in the unofficial "grey" market for the new bonds ranged from 17 to 28 cents on the euro, the paper said.

Greece, however, is unlikely to default this year because the successful bond swap will allow Athens to secure €130-billion fresh bailout loans from the European Union and the International Monetary Fund. The EU and the IMF sponsored a €110-billion bailout in 2010.

Late Friday the head of the IMF said she wants the fund to contribute €28-billion to the €130-billion in new loans.

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Christine Lagarde said that "the scale and length of the fund's support is a reflection of our determination to remain engaged" in helping Greece.

The €28-billion likely includes €10-billion left over from the IMF's contribution to Greece's first €110-billion bailout.

Ms. Lagarde said the IMF's executive board would decide on the final contribution next week.

Many economists doubt the debt swap, combined with the second bailout, are enough to put Greece on a sustainable economic and financial footing. The swap is designed to bring down Greece's debt to gross domestic product to about 120 per cent by 2020, against a crushing 160 per cent today.

But even the lower debt level is considered dangerous for an undiversified, sinking economy like Greece, which is entering its fifth year of deep recession as the austerity measures destroy economic growth. Economists note that Italy, with a far more diversified economy and much lower jobless rate, is struggling with a debt-to-GDP of 120 per cent.

On Thursday, the Greek government's statistics agency reported that the youth unemployment rate had climbed above 50 per cent.

The euro, which climbed strongly on Thursday on the expectation of a successful debt swap, fell slightly on Friday. Asian stocks were up.

With files from The Associated Press

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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