Athens: 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 debt in two weeks without the agreement, sparking turmoil in the markets and sending shock waves through the other 16 countries that use the euro.
Prime Minister Lucas Papademos called the deal -- which shaves some euro105 billion (USD 138 billion) off Greece's euro368 billion (USD 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 swap aiming to turn around the country's debt-ridden economy was a key condition to secure a euro130 billion (USD 172 billion) rescue package from other eurozone countries and the International Monetary Fund.
The managing director of the Institute of International Finance, which negotiated the deal with Greece for large investors, called the bond swap "the largest ever" debt 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," Charles Dallara told Greece's Mega television. He estimated Greece could return to the markets "within a few years." If recovery continues, "I think the risk for Greece and the risk on the eurozone will be very manageable," he said.
Of the investors holding the euro177 billion (USD 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.
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 ruled that a "restructuring credit event" 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 USD 3.2 billion in net outstanding credit default swap contracts linked to Greece. The exact level of payouts will be determined on March 19.
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.
The finance ministers from the 17-nation eurozone said Greece had fulfilled the conditions to get approval for the bailout next week. IMF chief Christine Lagarde, meanwhile, recommended the fund chip in euro28 billion (USD 36.7 billion) to the rescue package, which includes euro10 billion left over from Greece's first bailout. The IMF's board is set to decide on the final contribution next week.
The eurozone ministers on Friday already released up to euro35.5 billion (USD 47 billion) in bailout money to fund the debt swap. Investors exchanging bonds will receive up to euro30 billion -- or 15 percent of the remaining money they are owed -- as a sweetener for the deal and euro5.5 billion for outstanding interest payments.
European leaders hailed the deal as a seminal moment in their effort to stem the crisis and get Greece on its feet.
"The page of the financial crisis is being turned," said French President Nicolas Sarkozy.
And Greek Finance Minister Evangelos Venizelos told Parliament Friday: "I believe everyone will soon realize that this is the only way to keep the country on its feet and give it a second historic chance that it needs."
"A window of opportunity is opening" to reduce the country's euro368 billion debt by euro105 billion, or about 50 percentage points of gross domestic product, he said.
However, some economists are concerned that Greece is merely buying time. The breather allows European governments and banks to strengthen their financial defenses, leaving them less vulnerable if Greece eventually cracks.
The deal and expected bailout do "more to protect Europe from Greece than for Greece itself," said Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics.
Europe also has to contend with spiraling debt problems of Spain, Portugal and Ireland and Italy.
Markets, which had rallied on Thursday on expectations of a successful deal, were muted on Friday. The Stoxx 50 of leading European shares was up 0.6 percent, but the main stock index in Athens closed down 2.15 percent. The euro retreated 1.19 percent from recent highs to USD 1.3110.
On the streets of Athens, however, many were skeptical about the deal and pessimistic about the future. Panayiotis Theodoropoulos said the writedown was good "for them."
"For us? Nothing. Everyone looks out for themselves. In a while the people will be living on the streets," he said.
The debt crisis, sparked by years of overspending and waste, has left Greece relying on funds from international rescue loans since May 2010. Austerity measures including repeated salary and pension cuts and tax hikes have led to record unemployment with more than 1 million people out of work, a fifth of the labor force.
The country released statistics Friday showing the recession in the last quarter of 2011 was deeper than initially forecast, reaching 7.5 percent instead of 7 percent. The economy is expected to shrink for a fifth straight year in 2012, stagnate in 2013 and modestly expand in 2014.
First Published: Saturday, March 10, 2012, 11:07