The restructuring involves losses in excess of 50 percent for private investors — a once unthinkable event that many euro-zone officials wanted to avoid — and triggered payouts under the bond insurance contracts known as credit-default swaps, also a stigma Europe tried to dodge. But steady changes in recent months to the political leadership of wayward countries such as Italy, a more stern line at the International Monetary Fund and new European Central Bank policies helped temper the effects of the region’s first-ever sovereign debt write-down.
The sequence of events this week — culminating in the successful debt exchange agreement and announcements by the European Commission and the International Monetary Fund that new international loans for Greece will move forward — led European leaders to declare the crisis in abeyance.
After Greece announced that it had reached targeted savings of roughly $138 billion under the debt exchange, European leaders said they would move forward with their portion of a new $170 billion rescue package for the country, and the IMF said it would contribute roughly $36 billion as its share.
The IMF contribution will be offset substantially by about $30 billion Greece is due to repay the fund over the next four years under loans from an earlier rescue package.
The amount is far larger, compared with the size of Greece’s economy, than the IMF has provided to other troubled countries. But IMF managing director Christine Lagarde said it was warranted given the scale of Greece’s difficulties and the long-term work needed to rebuild its competitiveness.
“The scale and length of the Fund’s support is a reflection of our determination to remain engaged,” she said in a written statement. The IMF executive board will likely approve the new loans next week.
Relief in Athens
Few expect the debt restructuring to end Greece’s years-long struggle with a dysfunctional economy or to radically alter its fundamental financial problems.
Still, Greek officials were relieved. If enough investors had not signed up for the deal, the country would probably have defaulted within weeks when a major bond payment came due.
“I wish to express my appreciation to all of our creditors who have supported our ambitious plan of reform and adjustment and who have shared the sacrifices of the Greek people in this historic endeavor,” Greek Finance Minister Evangelos Venizelos said in a statement. The changes “will return Greece to a path of sustainable growth.”
Investors holding more than 85 percent of Greece’s outstanding $260 billion in privately held bonds voluntarily accepted the terms of the deal — a bitter pill but better to many than the alternative of a disorderly default that might have forced Greece to leave the euro and prompted unpredictable repercussions.
In announcing the deal, Greece invoked new clauses attached to its bonds to bring most other investors into the deal. That triggered payouts on a few thousand bond insurance contracts when the International Swaps and Derivatives Association ruled that the forced losses justified it. European officials had long sought to avoid such a “credit event.”
Perhaps $3 billion or less will change hands as a result of the ruling, an amount spread among many companies.
After a Friday conference call, euro-zone officials praised the outcome.
“I welcome the significant progress achieved in the preparation” of Greece’s second bailout, Luxembourg Prime Minister Jean-Claude Juncker said in a statement. “The Eurogroup was encouraged by the high private sector participation in Greece’s debt exchange offer.” Juncker leads the caucus of 17 countries that use the euro currency.
He indicated that the stage had been set for the euro zone and IMF to hand out the first installment of the $170 billion rescue package for Greece, its second bailout in two years. European finance officials will confer again next week to give final approvals for the payments.
Analysts said that the bailout had bought time not only for Greece but for Europe as a whole. But they also note that the fundamental economic troubles facing the region — problems of competitiveness, debt and growth — were hardly solved.
“Barring further accidents, things look manageable now,” said Daniel Gros, head of the Centre for European Policy Studies, a Brussels think tank. “Now there is a window of opportunity.”
Challenges still on horizon
Despite the new deal, reports from the international team of Greece’s creditors have painted a gloomy picture of the country’s prospects. Along with the debt write-down, the nation has been suffering from a long series of austerity measures and has taken steps to open its economy to investment and growth. But it will still strain to cut its debt levels to 120 percent of its gross domestic product by 2020: the target set by the IMF but one that many analysts consider still too high.
Should the country miss its growth or revenue targets by just a little bit — which it has, repeatedly, for years — it may be forced to seek yet more aid.
“It would be a big mistake to give the impression that the crisis has been resolved,” German finance minister Wolfgang Schaeuble told reporters in Berlin.
Greece still must meet Europe’s demand for more spending cuts as a condition of receiving the second bailout. In recent weeks the country sharply reduced its minimum wage and cut pensions and other entitlements. By June it will have to take measures to privatize state-owned companies and to liberalize protected industries.
But elections scheduled for next month may usher in a more skeptical parliament that could question some of the bailout’s requirements and potentially complicate efforts to meet them.
Nor is it clear that the problems will remain confined to Greece. After Friday’s announcement, many investors began looking toward Portugal, which has already received one bailout, as the next country to seek more aid. Portugal’s statistics agency announced Friday that its economy shrank 2.8 percent last year.
Staff writer Howard Schneider in Washington contributed to this report.