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Economy

Greece near finish line in race to slash debt

Greece has won strong backing for a bond swap deal with more than 80 percent of creditors accepting the offer. The swap is the largest restructuring of sovereign debt in history and clears the way for a new bailout.

According to the Greek finance ministry, holders of 85.8 percent of debt subject to Greek law and 69 percent of its international debt holders agreed to the debt swap, taking heavy losses on their investments.

Greek Finance Minister Evangelos Venizelos

Greek Finance Minister Evangelos Venizelos threatened to force lenders to sign up to the deal

Acceptance was high enough for the government to force unwilling investors to consent to the deal. Greek Finance Minister Evangelos Venizelos said earlier that the exchange was the best deal bondholders will get and he would activate so-called "collective action clauses" forcing losses on any bond holders who have not joined the swap.

The Greek finance ministry had made it clear that the alternative to the debt swap was a potential default, leading to a toal loss of assets. Evangelos Venizelos on Friday thanked creditors for their help in returning "Greece to a path of sustainable growth."

"On behalf of the republic, 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 endeavor," he said in a statement.

New bonds worth much less

The deal will mean embattled Greece slashes its debt burden and qualifies for fresh bailout money as part of the 130-billion-euro package from the IMF, European Union and European Central Bank.

On Friday, eurozone finance ministers are to hold an emergency telephone conference to discuss when to hand out Greece's latest bailout funds. The cash is needed both to finance the debt swap and keep the country's finances ticking over.

A shaved male head with a question mark

Private creditors agreed to a substanial "haircut" on Greek bonds

Banks, insurance companies and hedge funds signed up for the bond swap deal before a deadline late Thursday. The Greek finance ministry had in recent days written to every investor who owns Greek bonds and offered to swap the old bonds with newly-issued bonds.

The new bonds are worth a lot less. So, for instance, if an old state bond was worth 100 euros so far, it would be swapped for a bond worth 46.50 euros. At the same time, the bonds will have longer maturities and pay less interest. That means investors will take a real loss of over 70 percent on Greek debt.

But in order to make the swap more attractive to investors, the European Union financial stability fund EFSF – and not the Greek government - will issue bonds to the extent of 15 per cent of the initial value. That's why the approval of eurozone financial ministers is needed.

New EFSF cash injection

Luxembourg's Finance Minister Jean-Claude Juncker, left, playfully gestures toward Greek Finance Minister Evangelos Venizelos during a round table meeting of eurozone finance ministers at the EU Council building in Brussels on Monday, July 11, 2011. European officials are trying to work out a strategy Monday to prevent the eurozone's debt crisis from spilling over into bigger economies such as Italy and Spain, as they discuss details of a second bailout for Greece. (Foto:Virginia Mayo/AP/dapd)

Eurozone ministers won't have much time for light moments next week

Greece will also be on the agenda at a meeting of eurozone finance ministers on Monday. Greek banks need a fresh cash injection in order to survive their heavy losses on investments.

The Greek government will apply for a loan to the EFSF to restructure its ailing banks. An analysis by ratings agency Moody's says that the Greek banking system will practically see all its capital wiped out with the debt swap agreeement.

Moody's estimates that the Greek banking sector needs around 40 billion euros to stay afloat. That means that the debt deal could soon be followed by a bank bailout deal.

It's difficult to say how stocks and financial markets will react to the deal. But it's hoped that Thursday's agreement will at least briefly quell fears that the Greek crisis will send more shockwaves across Europe and further harm the global economy.

Autor: Bernd Riegert /sp
Editor: Gregg Benzow
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DW.DE