Greece has cleared a major hurdle in its race to avoid bankruptcy by persuading the vast majority of its private creditors to sign up to the biggest national debt writedown in history, paving the way for a second massive bailout.
Following weeks of intense discussions, the Greek government said today that 83.5% of private investors holding its government bonds were participating in a bond swap. Of the investors holding the 177 billion euro in bonds governed by Greek law, 85.8% joined.
"We have achieved an exceptional success... and I believe everyone will soon realise that this is the only way to keep the country on its feet and give it a second historic chance that it needs," finance minister Evangelos Venizelos told the Greek parliament.
He said he would recommend the activation of legislation known as "collective action clauses" to force bondholders who refused to sign up into the swap. The issue was to be discussed at a Cabinet meeting this afternoon.
"A window of opportunity is opening" with the success of the deal to reduce the country's 368 billion euro debt by 105 billion euro, or about 50 percentage points of gross domestic product, he said.
The bond swap is a radical attempt to pull Greece out of its debt spiral and put its shrinking economy back on the path to recovery. The hope is that by slashing debt, the country can gradually return to growth and eventually repay the remaining money it owes.
The investors will exchange their bonds with new ones worth 53.5% less in face value and easier repayment terms for Greece. A total of 206 billion euro of Greece's debt is in private hands.
The swap will effectively shift the bulk of the remaining debt into public hands - mainly eurozone countries contributing to Greece's bailouts.
If the exchange had failed, Greece would have risked defaulting on its debts in two weeks, when it faced a large bond redemption.
A successful bond swap is also a key condition for Greece to receive a 130 billion euro package of rescue loans from other eurozone countries and the International Monetary Fund.
Eurozone finance ministers said after a conference call today that Greece has fulfilled the conditions to get approval for the bailout soon.
"There is no doubt that we will be able to decide on the release of the second Greece package next week," German finance minister Wolfgang Schaeuble said. The IMF has set a tentative date of March 15 to discuss the size of its participation in the bailout.
The ministers also released up to 35.5 billion euro in bailout money to fund the debt swap. Investors exchanging bonds will receive up to 30 billion euro - or 15% of the remaining money they are owed - as a sweetener for the deal and 5.5 billion euro for outstanding interest payments.
"The debt exchange represents the largest ever sovereign debt restructuring," said Charles Dallara, the managing director of the Institute of International Finance, the body that negotiated the deal with the Greek government on behalf of large investors.
Markets, which had rallied on Thursday on expectations of a successful deal, were muted today. The Stoxx 50 of leading European shares was up 0.1%, but the main stock index in Athens was down 0.32% in midday trading. The euro retreated 0.4% from recent highs against the dollar to 1.3215.
"After quite a rollercoaster ride, it looks like Greece has finally done it... allowing Europe to avoid what could have been a disorderly default in which the costs do not bear thinking about," said Simon Furlong, a trader at Spreadex.
The International Swaps and Derivatives Association (ISDA) was meeting to determine whether the bond swap would be deemed a "credit event" - a technical default - which would trigger the payment of credit default swaps (CDS), which is essentially insurance against a default.
When the debt relief plan was first announced last year, eurozone leaders and the ECB worked hard to avoid a credit event, because they feared the a payout of CDS could destabilise big financial institutions that sold them.
However, now a CDS payout looks less threatening. The ISDA, a private organisation that rules on credit events, said that if triggered, overall payouts on CDS linked to Greece will be below 3.2 billion US dollars. That amount is spread over many financial firms and likely to be too small to significantly hurt any one of them.
Under Greece's bond swap, holders of 172 billion euro in Greek-law and foreign-law bonds agreed to sign up to the deal. By triggering the collective action clauses to force holdouts to join, Greece will secure a participation level of 95.7%, or 197 billion euro. The country also extended the deadline for holders of foreign law bonds, of whom 69% have so far signed up, until March 23.
EU economic affairs commissioner Olli Rehn said: "That contribution by the private sector is an indispensable element to ensure future sustainability of the Greek public debt and, thus, a decisive contribution to financial stability in the euro area as a whole," he said.
"I now expect the Greek authorities to maintain their strong commitment to the economic adjustment programme and to rigorously and timely implement the policy package."
IMF head Christine Lagarde also welcomed the debt writedown agreement. "This is an important step that will dramatically reduce Greece's medium-term financing needs and contribute to debt sustainability," she said.
The Fitch ratings agency has downgraded Greece to "restricted default" after the bond swap deal.
The move was expected, with ratings agencies having said they considered the bond swap deal to be a default.
The two other major ratings agencies, Moody's and Standard & Poor's, have already downgraded Greece to default level.