Private investors near deal on Greek debt

A disorderly and potentially devastating Greek debt default is looking much less likely.

Greece and investors who own its bonds have reached a tentative deal to significantly reduce the country’s debt and pave the way for it to receive a much-needed €130 billion bailout.

Negotiators for the investors announced the agreement yesterday and said it could become final next week. If the agreement works as planned, it will help Greece remain solvent and help Europe avoid a blow to its already weak financial system, even though banks and other bond investors will have to accept multi-billion-dollar losses.

Still, it doesn’t resolve the weakening economic conditions in Greece and other European nations as they rein in spending to get their debts under control.

Under the agreement, investors holding €206 billion in Greek bonds would exchange them for new bonds worth 60 per cent less.

The new bonds’ face value is half of the existing bonds.

They would have a longer maturity and pay an average interest rate of slightly less than 4 per cent. The existing bonds pay an average interest rate of 5 per cent, according to the think tank Re-Define.

The deal would reduce Greece’s annual interest expense on the bonds from about $10 billion to about $4 billion.

And when the bonds mature, instead of paying bondholders €206 billion, Greece will have to pay only €103 billion.

Without the deal, which would reduce Greece’s debt load by at least €120 billion, the bonds held by banks, insurance companies and hedge funds would likely become worthless. Many of these investors also hold debt from other countries that use the euro, which could also lose value in the event of a full-fledged Greek default. This is the scenario analysts fear most and why they hope investors will voluntarily accept a partial loss on their Greek bonds.

The agreement taking shape is a key step before Greece can get a second, €130 billion bailout from its European Union partners and the International Monetary Fund. Besides restructuring its debt with private investors, Greece must also take other steps before getting aid.

It must cut its deficit and boost the competitiveness of its economy through layoffs of government employees and the sale of several state companies, among other moves.

Greece faces a €14.5 billion bond repayment on March 20, which it cannot afford without additional help.

The country got its first bailout in May 2010 when the EU and the IMF signed off on a €110 billion aid package, most of which has already been disbursed.

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