Understanding Greece's bond swap deal
Tuesday, February 21, 2012
Greece has struck a vital debt relief deal with representatives of private investors to avoid a disastrous default. The agreement will help shield Europe's already weak financial system, even though banks, pension funds and other bond investors have to accept multibillion-dollar losses.
Here are some questions and answers about the agreement:
Q: What are the main points of the deal?
A: Banks, hedge funds, pension funds and other private investors who own around €200 billion in Greek government bonds have been asked to forgive Greece 53.5 percent of the face value of those bonds. That could immediately cut Greece's €350 billion ($460 billion) debt pile by €107 billion ($142 billion).
Interest rates on the remaining debt will be an average 3.65 percent compared to around 4.8 percent previously. Greece will also have 30 years to repay those bonds, up from just under seven years.
Overall savings will depend on how many investors agree to participate.
Q: Why is this agreement so important?
A: It is one of two critical steps — the other being deep cuts in government spending — required before Greece could receive a €130 billion ($170 billion) bailout from other countries in Europe and around the globe. Without this bailout, its second in two years, and the debt relief Greece would default on a €14.5 billion bond payment on March 20.
Q: And if Greece were to miss this bond payment, then what?
A: A Greek default would potentially spread the crisis to other eurozone countries, by making investors even more leery of lending to them. And analysts fear it could set off a chain reaction similar to the financial meltdown that occurred in the fall of 2008 and triggered the Great Recession.
Q: Why did private investors agree to a voluntary loss?
A: Without the deal, they risked getting nothing. And many of the same investors also hold debt from other eurozone countries, which would likely lose value in the event of a default.
Q: Might some investors refuse to go along?
A: Yes. However, Greece will soon put new legal clauses into its bonds that would force holdouts to participate.
Q: Aside from the private investors, who else owns Greek debt?
A: Another €50-55 billion ($65.5-72 billion) of Greek government bonds is held by the European Central Bank and other central banks. These are exempt from the writedown, but the central banks will forego profits on those holdings. All told, Greece's debt has reached roughly €350 billion ($459 billion), or more than 160 percent of annual economic output.
Q: Aren't cuts in government spending and other austerity measures helping?
A: Greece's government ran a deficit of 10.6 per cent of gross domestic product in 2011. It has promised the EU and International Monetary Fund that it will achieve a so-called primary surplus — a budget surplus when not counting interest payments on loans — in 2012. That promise hinges on the debt relief from private investors and a harsh austerity program of higher taxes and deep cuts in public spending and wages for at least until 2020.
Q. When was the last time a country defaulted on its debt?
A. The last major country to default on its debt was Argentina in 2002. The country finally managed to negotiate a settlement on its defaulted bonds in 2005.