Greece clinches vital debt deal

Tim Wallace
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THE VAST majority of private sector Greek bondholders agreed to take a massive writedown on their investments last night, opening the way for the second bailout to go ahead.

Around 95 per cent of creditors said they will swap their holdings into a mixture of cash and long-term debt worth a fraction of the bonds’ face value, an anonymous official said last night. The rest are likely to be forced to take losses by the Greek government’s collective action clauses (CACs).

But while this hurdle appears to have been passed – removing a barrier to the government receiving its latest €130bn (£109bn) bailout ­­– the country’s problems are far from solved. New figures out yesterday showed unemployment has risen to 21 per cent while youth unemployment has broken the 50 per cent mark.

The country is in its fifth year of recession, with GDP down 17 per cent on its pre-crisis peak and set to keep falling by more than four per cent this year.

The haircut will reduce debts to the private sector by 53.5 per cent, from €206bn to around €100bn as part of a longer-term plan to cut the country’s debts from 160 per cent of GDP now to 120.5 per cent by 2020.

However, for the plan to work the economy must return to growth in coming years – something which is far from certain to happen.

“The current bailout programme is unlikely to work – the Troika puts too much emphasis on austerity and not enough on pro-growth reforms and will keep Greece in a depression for too long,” said Holger Schmieding, chief economist at Berenberg Bank.

“Either the Troika changes its programme to focus on growth, or the crisis will recur again and again.”

Furthermore, forcing bondholders to take losses could trigger large insurance payments to investors who bought credit default swaps (CDS) to protect against the risk of the government failing to pay its debts – risking further turmoil on the financial markets.