ATHENS, Greece - Greece and its private investors are close to a deal that will significantly reduce the country's debt and pave the way for it to receive a much-needed C130 billion bailout.
Negotiators for the investors announced the tentative agreement Saturday and said it could become final next week.
Under the agreement, the investors would take a hit of more than 60 per cent on the C206 billion of Greek debt they own.
Here's how it would work: 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 (compared with an estimated 5 per cent on the existing bonds).
Without the deal, which would reduce Greece's debt load by at least C120 billion, the private investors' bonds would likely become worthless. Many of these investors also hold debt from other eurozone countries, which could also lose value in the event of a Greek default.
The agreement taking shape is a key step before Greece can get a second, C130 billion bailout from its European Union partners and the International Monetary Fund, although there are other issues involved before Greece can get that aid. This would be Greece's second bailout. The EU and the IMF signed off on a C110 billion aid package for Greece in May 2010, most of which has already been disbursed.
Greece faces a C14.5 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 -- nearly 200 per cent of the country's 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. However, austerity alone will not fix Greece's problem. The country must also find ways boost its economic output, which at the moment is shrinking.
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. It could even lead Greece to withdraw from the euro.
The banks, insurance companies and other private holders of Greek bonds are being represented by Charles Dallara, managing director of the Washington-based Institute of International Finance, and Jean Lemierre, senior adviser to the chairman of the French bank BNP Paribas.
The main creditor negotiators will leave Greece on Sunday and will remain in close consultation with Greek and other authorities.
