Biggest debt restructuring in history buys Greece only 'a bit of time'

Greece has succeeded in pushing through the biggest sovereign debt restructuring in history, with 85.8 percent of those holding private Greek debt agreeing to join a debt write-off deal, according to the Ministry of Finance in Athens. 

The deal cuts Greek debt by around €105 billion ($138.8 billion) – about half of the country's private debt –  and clears the way for Greece's second international bailout package, this one worth €130 billion ($173 billion). European finance ministers said today that they would immediately release the first tranche of the funds, worth €35 billion ($46.2 billion).

While European leaders welcomed the deal, analysts warn that it only buys Greece a bit of time to address the underlying problems.

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

EU Monetary Affairs Commissioner Olli Rehn called the terms of the agreement “very satisfying,” and German Finance Minister Wolfgang Schäuble said, Greece was “not out of the woods yet, but on a good way."

The deal private investors have agreed to means they will write off 53.5 percent of private debt – a real loss of 74 percent when the loss in future interest payments is taken into account. The deal also includes a debt swap in which lenders will exchange the rest of the bonds they hold for new ones worth less, have a longer maturity of up to 30 years and pay less interest. The Greek government now plans to legally force the few remaining lenders to sign on to the deal through a so-called Collective Action Clauses (CACs). 

The good news out of Athens was overshadowed by the release of Greece’s latest growth figures, which show that the economy shrank by 7.5 percent in the last quarter of 2011. It is this deep recession that worries analysts like Peter Bofinger, an economist at Würzburg University.

“Greece would have needed a 100 percent haircut, including the public creditors like the European Central Bank,” he says. “But most of all, Greece needs growth. It needs investment and jobs. Right now I don’t see where these should come from.”

“This is not a time for celebration,” says Constantine Michalos, president of the Athens Chamber of Commerce. “The deal is a pain relief in the great illness the Greek society has been going through in the last two years.”

Referring to the reaction of financial markets around the globe, which went down after the announcement of the deal and the subsequent use of CACs, Mr. Michalos said that investors still needed to be convinced that Greece was now on an upward trajectory.

“If we can’t convince them, we’ll be back to where we were yesterday in three months' time," he said.