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Greece secures deal to lower debt, avoid default

March 09, 2012|By Nathaniel Popper
  • Holders of Greek bonds had until Thursday to agree to trade in their old Greek bonds for new ones with a lower face value.
Holders of Greek bonds had until Thursday to agree to trade in their old Greek… (Petros Giannakouris )

Reporting from New York — Greece has successfully pushed through a deal to lower its debt burden and avoid defaulting on its outstanding bonds in the near future.

Holders of Greek bonds had until Thursday to agree to trade in their old Greek bonds for new ones with a lower face value. After tabulating all the responses, Greece said overnight that over two thirds of its bondholders agreed to the exchange -- the threshold necessary for the deal to go forward.

If Greece was unable to secure agreement from enough of its creditors it was expected to default on bond payments due later this month, which would likely have set off some amount of economic panic.

Stocks sank earlier this week when doubts arose about whether enough bondholders would agree to participate. The announcement of the Greek deal helped push stocks higher Friday morning in Europe and around the globe, as did a good report on U.S. jobs later in the morning.

Not all holders of Greek bonds agreed to the deal. Of the investors holding 177 billion euros of bonds issued under Greek law, less than 10% did not agree to go along with the deal. Greece, though, recently changed its laws so that if over two thirds of bondholders agreed to the swap, all bondholders will be forced to go along.

Greece has not been able to change the laws for the smaller amount of bonds issued under foreign law. Some investors holding these bonds have held out, hoping they can force Greece to pay them fully for their bonds. But Greece said that a majority of the investors holding these bonds also agreed to a swap.

The Greek finance minister, Evangelos Venizelos, said in a statement: "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."

One point of uncertainty going forward is whether the exchange will be enough to trigger the insurance that some investors bought on Greek bonds, known as credit default swaps. Credit default swaps are supposed to pay out when an underlying bond defaults. An industry committee will meet Friday to vote on whether the Greek deal qualifies as a default.

Moving forward there are still questions about whether the exchange will be enough to allow Greece to remain solvent and begin some measure of economic recovery. As part of the plan, Greece is set to make big cuts to its budget so that it can continue making payments on its billions of still-outstanding debt. But some analysts say that the country still could default on those bonds in the future.

"Nothing consequential has been done to stave off eventual default on the part of Greece," market watcher Dennis Gartman wrote in a note to clients. "The economic can has been kicked."

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