- Associated Press - Friday, March 9, 2012

ATHENS — Greece’s creditors agreed Friday to take cents on the euro in the biggest debt writedown in history, providing much-needed breathing room for European nations living beyond their means. The agreement paves the way for Greece to receive an enormous second bailout in the hopes of containing the crisis before it drags the entire continent further into chaos.

Without the agreement, Greece would have risked defaulting on its debts in two weeks’ time, an event that would have sparked turmoil in the financial markets and sent shockwaves through the other 16 countries that use the euro.

Following weeks of intense discussions, the Greek government said Friday that 83.5 percent of private investors holding its government debt had agreed to a bond swap that would involve them taking a cut in more than half the face value of their investments with softer repayment terms for Greece.

The bond swap was a radical attempt to pull Greece out of its debt spiral and put its shrinking economy back on the path to recovery. The deal is also a key condition for Greece to receive a euro130 billion ($172 billion) package of rescue loans from other eurozone countries and the International Monetary Fund.

“We have achieved an exceptional success … and I believe everyone will soon realize that this is the only way to keep the country on its feet and give it a second historic chance that it needs,” Finance Minister Evangelos Venizelos told Parliament.

“A window of opportunity is opening” with the success of the deal to reduce the country’s euro368 billion debt by euro105 billion, or about 50 percentage points of gross domestic product, he said.

Of the investors holding the euro177 billion ($234 billion) in bonds governed by Greek law, 85.8 percent joined. The deadline for those holding foreign-law bonds was extended to March 23.

Creditors holding Greek-law bonds who refused to sign up will be forced into the deal, with the Cabinet approving during a meeting Friday the activation of legislation known as “collective action clauses.”

The settlement date for Greek-law bonds is set for Monday, and April 11 for foreign-law bonds.

The Fitch ratings agency downgraded Greece to “restricted default” over the bond swap — a move that had been expected. Fitch was the third agency to downgrade Greece into default, after Moody’s and Standard & Poor’s.

“The downgrade … reflects Fitch’s previous commentary that the exchange would constitute a sovereign default event under the agency’s distressed debt exchange rating criteria,” it said. The agencies are expected to raise the country’s credit rating after the completion of the swap.

Finance ministers from the 17-nation eurozone said after a conference call Friday that Greece had fulfilled the conditions to get approval for the bailout next week. The IMF has set a tentative date of March 15 to discuss the size of its participation.

The ministers also released up to euro35.5 billion ($47 billion) in bailout money to fund the debt swap. Investors exchanging bonds will receive up to euro30 billion — or 15 percent of the remaining money they are owed — as a sweetener for the deal and euro5.5 billion for outstanding interest payments.

“The debt exchange represents the largest ever sovereign debt restructuring,” said Charles Dallara, the managing director of the Institute of International Finance, the body that negotiated the deal with the Greek government on behalf or large investors.

European leaders hailed the deal as a seminal moment in their effort to stem the crisis and get Greece on its feet.

“The page of the financial crisis is being turned,” said French President Nicolas Sarkozy.

However, some economists are concerned that Greece is merely buying time. The breather allows European governments and banks to strengthen their financial defenses, leaving them less vulnerable if Greece cracks a few months or even a few years from now.

The bond swap deal and the expected bailout loans do “more to protect Europe from Greece than for Greece itself,” said Jacob Funk Kirkegaard, research fellow at the Peterson Institute for International Economics.

Europe also has to contend with spiraling debt problems of Spain, Portugal and Ireland and Italy.

Markets, which had rallied on Thursday on expectations of a successful deal, were muted on Friday. The Stoxx 50 of leading European shares was up 0.6 percent, but the main stock index in Athens closed down 2.15 percent. The euro retreated 1.19 percent from recent highs to $1.3110.

The International Swaps and Derivatives Association was meeting to determine whether the bond swap would be deemed a so-called “credit event” — a technical default — which would trigger the payment of credit default swaps, which is essentially insurance against a default.

When the debt relief plan was first announced last year, eurozone leaders and the ECB worked hard to avoid a credit event, because they feared the a payout of CDS could destabilize big financial institutions that sold them.

However, since then a CDS payout has started to look less threatening. The ISDA, a private organization that rules on credit events, said that if triggered, overall payouts on CDS linked to Greece will be below $3.2 billion.

EU economic affairs commissioner Olli Rehn said he was “very satisfied” by the high turnout, and urged Athens to press ahead with its austerity program, implemented over the past two years amid deep popular resentment.

On the streets of Athens, however, many were skeptical about the deal and pessimistic about the future. Panayiotis Theodoropoulos said the writedown was good “for them.”

“For us? Nothing. Everyone looks out for themselves. In a while the people will be living on the streets,” he said.

The debt crisis, sparked by years of overspending and waste, has left Greece relying on funds from international rescue loans since May 2010. Austerity measures including repeated salary and pension cuts and tax hikes imposed in return have led to record unemployment with more than 1 million people out of work, a fifth of the labor force.

Statistics released Friday showed the recession in the last quarter of 2011 was deeper than initially forecast, reaching 7.5 percent instead of 7 percent. The economy is expected to shrink for a fifth straight year in 2012, stagnate in 2013 and modestly expand in 2014.

Nicholas Paphitis and Demetris Nellas in Athens, Gabriele Steinhauser in Brussels and Geir Moulson in Berlin contributed to this report.