Greece scales obstacles for second bail out

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BRUSSELS, March 9, 2012 (AFP) – Greece took a critical step Friday to avoid bankruptcy with an unprecedented debt write-off deal, allowing eurozone finance ministers to announce a second bailout was on track.

The event means Greece is now set to repay debt due soon and has a second chance to rebuild its shattered economy, while the eurozone has dodged default chaos that could have destabilised global financial markets.

But it also led a key derivatives group to declared that Greece had witnessed a “credit event” that triggers payment of insurance policies known as credit default swaps to investors in Greek bonds.

A committee of the International Swaps and Derivatives Association voted unanimously to declare the credit event after a large majority of Greece’s private creditors signed on to a debt swap aimed at erasing 107 billion euros ($140 billion) worth of Athens’ debt.

EU officials had previously welcomed with relief the largest debt swap ever undertaken, but financial analysts warned the Greek problem was simply contained, not buried.

“The Eurogroup considers that the necessary conditions are in place to launch the relevant national procedures required for the final approval of the euro area’s contribution to the financing of the second Greek adjustment programme,” Eurogroup head Jean-Claude Juncker said.

The eurozone finance ministers group held a conference call on Friday, and they were to meet on Monday in Brussels.

German Finance Minister Wolfgang Schaeuble said they had already released 35.5 billion euros in funds to cover eurozone participation in the bond swap, and that the remaining 94.5 billion euros, essentially loans to Athens, would probably be released next week.

“We are not out of the woods but we have taken an important big step,” Schaeuble said.

EU Economics Affairs Commissioner Olli Rehn called the successful swap offer a “decisive contribution to financial stability in the euro area as a whole.”

International Monetary Fund head Christine Lagarde said the latest step “will dramatically reduce Greece’s medium-term financing needs and contribute to debt sustainability.”

Greek Prime Minister Lucas Papademos saw a “historic success” and told the nation in a televised message: “A window of hope is opening up for Greece” amid its “worst post-war crisis”.

“With the reduction of about 105 billion euros of debt Greeks can look to the future with more confidence,” he said.

The debt deal was reached “with the help of our (European) partners, the sacrifices of the Greek people and the cooperation of the political parties which back the (coalition) government”, he said.

A large majority of private Greek creditors agreed to cancel more than half the money owed to them, and officials said the swap would substantially reduce Athens’ total debt of roughly 350 billion euros.

The deal was a key condition of the second bailout, along with approval by the Greek parliament of a raft of measures to help balance the budget and free up the country’s economic potential.

The swap results were announced just before official data showed that the Greek economy, in recession since 2008, has shrunk even more than expected.

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The state statistics agency said the economy had contracted by 7.5 percent in the fourth quarter of 2011, revising a previous 7.0-percent estimate.

On an annual basis, this meant output shrank by 6.9 percent, compared with a previous forecast of 5.5 percent.

The high level of acceptance by private creditors met criteria for the EU and IMF to push on with an even bigger bailout for Greece, and Athens said it would mop up remaining bonds affected by the exchange in the next two weeks.

“Seven billion euros remain in reality,” Finance Minister Evangelos Venizelos said after the finance ministry said creditors had tendered bonds amounting to 83.5 percent of the debt Athens aimed to cut.

On the basis of full acceptance, Greece would secure a write-off worth 107 billion euros.

It is hoped that will keep Athens on track to cutting its debt to about 120 percent of gross domestic product (GDP) by 2020.

Venizelos said all bonds issued under Greek law had been accounted for by virtue of legislation known as collective action clauses that enable Greece to force compliance on all investors.

A government source later said the clauses had been activated.

Holders of bonds issued under foreign law, and of bonds issued by state companies guaranteed by Greece, will be given until March 23 to decide, the minister said.

He warned however that investors would be “naive” to expect a better offer.

Fitch Ratings then cut Greece to a “restricted default” rating, which Fitch said constitutes “a sovereign default event under the agency’s distressed debt exchange (DDE) rating criteria.”

A full-blown default would be catastrophic for Greece, and could cost the eurozone up to one trillion euros according to one estimation while sending shockwaves through global markets.

European shares closed moderately higher a day after sharp rallies on anticipation of the deal. The euro eased to $1.3115.

Berenberg Bank chief economist Holger Schmieding commented that “of course, the Greek issue won’t go away.

“Whether or not Greece can bear its debt burden is more a question of its future growth potential than of its precise debt burden,” he said, adding: “Greece really needs to turn itself into a better place for investors.”

Greece’s use of CACs could trigger anti-default insurance contracts known as credit default swaps.