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Greece nears debt reduction deal with bondholders

A tentative new agreement would see the country’s private debts slashed by around 60 per cent over time.

A pedestrian passes by flags for sale in Athens last year
A pedestrian passes by flags for sale in Athens last year
Image: AP/Press Association Images

A DISORDERLY AND potentially devastating Greek debt default is looking much less likely after the country reached a tentative deal with private investors.

The agreement would 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 multibillion-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 percent 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 percent. The existing bonds pay an average interest rate of 5 percent, 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 the EU and IMF.

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

More: EU could take over control of Greek economy, German official warns>

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Associated Press

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