ATHENS, (Reuters) – Greece averted the immediate threat of an uncontrolled default on Friday, winning strong acceptance from its private creditors for a bond swap deal which will eat into its mountainous public debt and clear the way for a new bailout.
Euro zone ministers held a teleconference call and were expected to declare Greece had met the tough terms of the 130 billion euro ($172 billion) rescue, and approve the release of funds which Athens needs to meet heavy debt repayments later this month.
But markets sharply marked down the value of new Greek bonds to be issued to the creditors, reflecting the risk of paralysis after elections expected this spring and doubts about whether Athens can bring its debt to a more manageable level by 2020.
On the streets of Athens, some Greeks denounced the deal as a sham that would impose more crippling austerity on a people already enduring pay and pension cuts and soaring unemployment.
However, Finance Minister Evangelos Venizelos hailed the swap – which the European Union and IMF had demanded in return for the country’s second bailout since 2010 – as marking a long-awaited success for all Greeks enduring a painful recession.
“Today, after a very long time, is a very good day (for Greece) as well as for me personally,” he told parliament, saying the deal had cut its debt burden by 105 billion euros.
“I hope everyone will realize, sooner or later, that this is the only way to keep the country on its feet and give it the second historic chance that it needs,” said Venizelos, who led often ill-tempered negotiations with the European Union and International Monetary Fund on the bailout.
Jean-Claude Juncker, who chairs the Eurogroup of euro zone finance ministers, was expected to say that the “Troika” of inspectors from the European Commission, European Central Bank and IMF believed Athens had kept its side of the bargain.
“I particularly welcome the detailed assessment of the Troika that Greece has implemented all agreed prior actions in a satisfactory manner,” Juncker will say, according to a draft statement obtained by Reuters.
In the statement, to be released after the Eurogroup call, Juncker will say everything is in place for the euro zone to deliver its part of the bailout package and that he looks forward to a significant IMF contribution. The IMF’s board will discuss on March 15 to discuss the size of the its funding.
The group is expected to release funds next week. Athens must have the money by March 20 when some 14.5 billion euros of bond repayments are due, which it cannot hope to repay alone.
Some ordinary Greeks failed to share the leaders’ enthusiasm for the “Private Sector Involvement” (PSI) bond swap.
“The PSI is a sham, it won’t save us. Our pockets are empty and there is more austerity under the table – just wait till after the elections,” said 54-year old housewife Mary Vetsi told Reuters outside parliament.
Under the biggest sovereign debt restructuring in history, Greece’s private creditors will swap their old bonds for new ones with a much lower face value, lower interest rates and longer maturities. This means they will lose about 74 percent on the value of their investments.
The finance ministry said creditors had tendered 85.8 percent of the 177 billion euros in bonds regulated by Greek law. This would reach 95.7 percent of all privately-held Greek debt with the use of “collective action clauses” to enforce the deal on creditors who refused to take part voluntarily.
European Economic and Monetary Affairs Commissioner Olli Rehn, a leading figure in efforts to protect far bigger economies with debt problems such as Italy and Spain, said the swap made “a decisive contribution to financial stability in the euro area as a whole”.
But he warned Athens, which has a record of failing to meet its austerity promises. “I now expect the Greek authorities to maintain their strong commitment to the economic adjustment program and to rigorously and timely implement the policy package,” he said in a statement.
Greece remains a long way from solving its daunting economic, political and social problems. Reforms demanded by the EU and IMF along with deep budget cuts have provoked serious violence in Athens and helped propel unemployment well over 20 percent.
The country also faces the elections in April or May when the pro-bailout conservatives and socialists face an array of smaller parties to the left and right that reject the rescue, and may struggle to form an effective government.
Traders priced in the profound doubts surrounding a program which aims to cut Greece’s debt from a towering 160 percent of its annual economic output now to a slightly more manageable 120 percent by 2020.
On the grey market, they indicated prices far below the face value of new bonds which will be issued to creditors on Monday.
Spanish and Italian bond yields fell following the Greek announcement. However, those on debt issued by Portugal, which has also been bailed out by the EU and IMF, rose as investors looked for the euro zone’s next weakest link.
The deadline for acceptance of the offer for bonds governed by international law and for state-guaranteed bonds issued by public companies has been extended to March 23.
Athens confirmed it would enforce the deal, activating collective action clauses (CACs) on the bonds regulated under Greek law. It will not be so easy to force holders of bonds governed by foreign laws to come to the table.
Venizelos warned skeptical creditors against refusing to accept the swap in the hope of being repaid in full. “This is naive thinking,” he told reporters.
Using the CACs is likely to trigger payouts on the credit default swap (CDS) insurance that some investors hold on the bonds. The International Swaps and Derivatives Association is meeting on Friday to decide whether Greek CDS will pay out.
“It almost now certainly going to trigger CDS. If this doesn’t trigger it, nothing will,” said Nick Stamenkovic, a bond strategist at RIA Capital markets in Edinburgh.
Venizelos played down the consequences. “The net amount at stake globally if CDS are triggered is less than 5 billion (euros),” he told parliament. “This is a totally negligible sum for the Greek and the European economy.”
Despite the success, the deal will not solve Greece’s deep-seated problems and at best it may buy time for a country facing its biggest economic crisis since World War Two.
Markets showed investors have no faith that the bond swap will draw a line under the country’s troubles. Under Greece’s austerity and reform program, its debt burden in 2020 should fall to where Portugal’s is now.
If investors believed Athens could succeed, yields on Greek and Portuguese bonds should be similar. But on the grey market, the new Greek bonds were yielding 17-21 percent, far above Portuguese levels around 11-14 percent.
“The market is pricing a high risk premium which reflects uncertainty over upcoming elections in Greece and reform implementation risk,” said one Athens dealer.
Greece has staggered from deadline to deadline since its crisis broke two years ago and several of its international partners have expressed open doubts about whether its second major bailout will be the last.
Public support for the two parties that back the bailout – those in the coalition of technocrat Prime Minister Lucas Papademos – remains low.
“After the elections, no matter when these will take place, we (must) have a government of authority, determined to walk the difficult path of reforms. Otherwise, all sacrifices that were made will be wasted,” said the Athens financial daily Imerisia.
Resentment has grown among ordinary Greeks over the austerity medicine ordered by international creditors which has compounded the pain from a slump which has seen the economy shrink by a fifth since 2008.