Private investors negotiate terms for Greek bond swap

Greece and investors who have bought its bonds have reached a tentative deal to significantly reduce the country's debt and pave the way for it to receive a €130 billion ($208 billion) bailout.

Negotiators for the investors announced the tentative agreement yesterday and said it could become final this week.

Under the agreement, the €206 billion worth of Greek bonds that investors own would be exchanged for new bonds worth 60 per cent less. That will help Greece remain solvent

Private investors would receive new bonds whose face value is half of the existing bonds. The new bonds 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, says think tank Re-Define.

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

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.

The agreement 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 cut its deficit and boost the competitiveness of its economy through layoffs of government employees and the sale of several state companies.

This would be Greece's second bailout. The EU and the IMF signed off on a €110 billion aid package for Greece in May 2010, most of which has already been disbursed.

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

Private investors hold roughly two-thirds of Greece's debt, which has reached an unsustainable level at nearly 200 per cent of the country's annual economic output.

By restructuring the debt held by private investors, Greece and its EU partners are hoping to bring that ratio closer to 120 per cent by the end of this decade.

In return for the first bailout, Greece's public creditors the International Monetary Fund, the European Union and the European Central Bank have unprecedented powers over Greek spending.

If no debt-exchange deal is reached with private creditors and Greece is forced to default, it would very likely spook Europe's and possibly the world's financial markets.

BOND DEAL

* €206b worth of bonds owned by investors will be swapped for new ones.
* New bonds will have a longer maturity and pay an average interest rate of less than 4 per cent.
* Deal will reduce Greece's annual interest expense on the bonds from about €10b to €4b.
* When the bonds mature Greece will pay €103 billion instead of €206 billion.

- AP