Tentative deal foils Greece's default
Source: Agencies |
January 30, 2012, Monday
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Print Edition
Print Edition
A disorderly and potentially devastating Greek debt default is looking much less likely.
Greece and investors who own its bonds have reached a tentative deal to sharply cut the country's debt and pave the way for it to receive a 130 billion euro (US$172 billion) bailout.
Negotiators for the investors announced the agreement on Saturday and said it could become final this week. If the deal works as planned, it will help Greece remain solvent and help Europe avoid a blow to its already weak financial system, though banks and other bond investors will have to accept multibillion-dollar losses.
Under the deal investors holding 206 billion euros in Greek bonds would exchange them for new bonds worth 60 percent less.
The new bonds' face value is half of the existing bonds. They would have a longer maturity and pay an average interest rate of slightly less than 4 percent. The existing bonds pay an average interest rate of 5 percent, according to the think tank Re-Define.
The deal would reduce Greece's annual interest expense on the bonds from about US$10 billion to about US$4 billion. And when the bonds mature, instead of paying bondholders 206 billion euros, Greece will have to pay only 103 billion euros.
Without the deal, which would reduce Greece's debt load by at least 120 billion euros, the bonds held by banks, insurance companies and hedge funds would likely become worthless. Many of these investors also hold debt from other countries that use the euro, which could also lose value in the event of a full-fledged Greek default. This is the scenario analysts fear most and why they hope investors will voluntarily accept a partial loss on their Greek bonds.
The agreement taking shape is a key step before Greece can get a second 130 billion euro bailout from its European Union partners and the International Monetary Fund. Besides restructuring its debt with private investors, Greece must also take other steps before getting aid. It must cut its deficit and boost the competitiveness of its economy through layoffs of government employees and the sale of several state companies, among other moves.
Greece faces a 14.5 billion euro bond repayment on March 20, which it cannot afford without additional help.
The country got its first bailout in May 2010 when the EU and the IMF signed off on a 110 billion euro aid package, most of which has already been disbursed.
Private investors hold roughly two-thirds of Greece's debt, which has reached nearly 160 percent of the country's annual economic output. By restructuring the debt held by private investors, Greece and its EU partners are hoping to bring that ratio closer to 120 percent by the end of this decade.
Greece and investors who own its bonds have reached a tentative deal to sharply cut the country's debt and pave the way for it to receive a 130 billion euro (US$172 billion) bailout.
Negotiators for the investors announced the agreement on Saturday and said it could become final this week. If the deal works as planned, it will help Greece remain solvent and help Europe avoid a blow to its already weak financial system, though banks and other bond investors will have to accept multibillion-dollar losses.
Under the deal investors holding 206 billion euros in Greek bonds would exchange them for new bonds worth 60 percent less.
The new bonds' face value is half of the existing bonds. They would have a longer maturity and pay an average interest rate of slightly less than 4 percent. The existing bonds pay an average interest rate of 5 percent, according to the think tank Re-Define.
The deal would reduce Greece's annual interest expense on the bonds from about US$10 billion to about US$4 billion. And when the bonds mature, instead of paying bondholders 206 billion euros, Greece will have to pay only 103 billion euros.
Without the deal, which would reduce Greece's debt load by at least 120 billion euros, the bonds held by banks, insurance companies and hedge funds would likely become worthless. Many of these investors also hold debt from other countries that use the euro, which could also lose value in the event of a full-fledged Greek default. This is the scenario analysts fear most and why they hope investors will voluntarily accept a partial loss on their Greek bonds.
The agreement taking shape is a key step before Greece can get a second 130 billion euro bailout from its European Union partners and the International Monetary Fund. Besides restructuring its debt with private investors, Greece must also take other steps before getting aid. It must cut its deficit and boost the competitiveness of its economy through layoffs of government employees and the sale of several state companies, among other moves.
Greece faces a 14.5 billion euro bond repayment on March 20, which it cannot afford without additional help.
The country got its first bailout in May 2010 when the EU and the IMF signed off on a 110 billion euro aid package, most of which has already been disbursed.
Private investors hold roughly two-thirds of Greece's debt, which has reached nearly 160 percent of the country's annual economic output. By restructuring the debt held by private investors, Greece and its EU partners are hoping to bring that ratio closer to 120 percent by the end of this decade.
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