Greece secures biggest debt deal in history

By Gabriele Steinhauser

Associated Press

Published: Friday, March 9 2012 12:00 a.m. MST

People wait to receive money from an ATM at an Alpha Bank branch in Athens, on Thursday, March 8, 2012. Greece's race to slice euro107 billion ($140 billion) off its national debt entered the final stretch Thursday, with markets confident enough private investors will decide to accept a deal to write down the value of their Greek bond holdings.

Thanassis Stavrakis, Associated Press

ATHENS, Greece — Greece's private creditors agreed Friday to take cents on the euro in the biggest debt writedown in history, paving the way for an enormous second bailout for the country to keep Europe's economy from being dragged further into chaos.

Greece would have risked defaulting on its debts in two weeks without the agreement, sparking turmoil in the financial markets and sending shock waves through the other 16 countries that use the euro.

Prime Minister Lucas Papademos called the deal — which shaves some €105 billion ($138 billion) off Greece's €368 billion ($487 billion) debt load — an important "historic success" in a televised address to the nation Friday night. "For the first time, Greece is not adding but taking debt off the backs of its citizens."

The country said 83.5 percent of private investors holding its government debt had agreed to a bond swap, taking a cut of more than half the face value of their investments as well as accepting softer repayment terms for Greece.

The radical swap aimed to put the country's debt-ridden economy on the road to recovery, and was a key condition to secure a €130 billion ($172 billion) rescue package from other eurozone countries and the International Monetary Fund.

Charles Dallara, the managing director of the Institute of International Finance, which negotiated the deal with the Greek government on large investors' behalf, described the bond swap as "the largest ever" restructuring.

"This has been painful and the pain is not over yet. But I now can see light at the end of the tunnel for the Greek economy," Dallara told Greece's Mega television. He estimated Greece could return to the markets "within a few years" and said that if recovery continues, "I think the risk for Greece and the risk on the eurozone will be very manageable."

Of the investors holding the €177 billion ($234 billion) in bonds governed by Greek law, 85.8 percent joined. The deadline for those owning foreign-law bonds was extended to March 23.

Creditors holding Greek-law bonds who refused to sign up will be forced into the deal — breaking a taboo that the eurozone had upheld until just weeks ago.

The decision to force losses on some bondholders means that the debt relief will trigger payouts of so-called credit default swaps, a type of insurance on bonds.

The International Swaps and Derivatives Association, the private organization that rules on such cases, said its committee "resolved unanimously that a Restructuring Credit Event has occurred."

When the debt relief plan was first announced last year, eurozone leaders and the European Central Bank worked hard to avoid a credit event because they feared the payout of credit default swaps could destabilize big financial institutions that sold them.

But since then, that prospect has started to look less threatening. The ISDA said that if triggered, overall payouts will be significantly below the $3.2 billion in net outstanding CDS contracts linked to Greece. The exact level of payouts will be determined on March 19.

"We do not foresee a significant impact of the Greek credit event on financial markets," ISDA CEO Robert Pickel said.

The Fitch ratings agency downgraded Greece to "restricted default" over the bond swap — a move that had been expected. Fitch was the third agency to downgrade Greece into default, after Moody's and Standard & Poor's. The agencies are expected to raise the country's credit rating after the completion of the swap.

Earlier Friday, finance ministers from the 17-nation eurozone said Greece had fulfilled the conditions to get approval for the bailout next week. The IMF has set a tentative date of March 15 to discuss the size of its own participation.

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