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Greek bond swap gains momentum as deadline nears

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GABRIELE STEINHAUSER and NICHOLAS PAPHITIS | March 7, 2012 01:44 PM EST | AP

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BRUSSELS — Greece saw investors' participation in a massive debt relief deal rise on Wednesday, bringing the country closer to avoiding a default that would plunge it into financial chaos and re-ignite the European debt crisis.

About 24 hours before the deadline for acceptances, investors owning around half of Greece's privately-held debt had committed publicly to the bond swap, in which they will accept losses to avoid facing even bigger ones in the event of an outright default by Athens.

For the deal to work – and for Greece to secure a related euro130 billion ($171 billion) bailout – Greece needs 90 percent of investors to sign up. However, a voluntary participation rate of around 70 percent could be enough to force most holdouts to go along.

Greece's financial troubles are the epicenter of Europe's two-year crisis, so successfully lightening its debt load is crucial to the overall plan of keeping the 17-nation euro currency afloat. The euro and stock markets rose on Wednesday as confidence over the bond swap grew.

The Institute of International Finance, which has been leading the debt talks for large private creditors, said firms holding euro84 billion ($111 billion) of Greek bonds have agreed to the deal. The 32 firms include 12 that declared their participation on Monday as well as all major Greek and Cypriot banks. German reinsurer Munich Re, which holds some euro1.6 billion in Greek bonds, also said it will participate.

On top of that, some euro14 billion in bonds owned by Greek investment funds but managed by the central bank will also agree to the swap, Finance Minister Evangelos Venizelos said. Greek officials are hopeful that funds that directly manage another euro3 billion in bonds would also sign up.

After the latest announcements, officials in Athens and other European capitals sounded optimistic that they will get the necessary participation to make the deal work

"I am very, very confident," Jean-Claude Juncker, the prime minister of Luxembourg who is also the main spokesman for the euro countries, said when asked about the debt swap.

Under the deal, private creditors will swap their Greek bonds for new ones with a face value reduced by 53.5 percent, longer repayment deadlines and lower interest rates. Overall, they will lose some 75 percent on their bondholdings.

Greece says that despite the losses the debt swap is a good deal for investors, since they would go empty-handed if the country can't secure the bailout package from the eurozone and the International Monetary Fund that is tied to the debt relief.

Investors holding a total of euro206 billion ($271 billion) in Greek bonds have until Thursday evening to decide whether they want to participate in the bond swap. If all of them sign up, the deal would wipe euro107 billion off Greece's euro350 billion debt pile. The Greek government will announce the result of the bond swap tender no earlier than Friday morning.

At the very least, Greece needs to reach a voluntary participation rate of 66.7 percent of investors holding euro177 billion in bonds issued under Greek law. That number would allow it to force the deal onto holdouts using new legislation it passed through Parliament last month.

For some euro28 billion in Greek bonds – including euro10 billion from state-owned companies – that have been issued under foreign law, forcing investors to participate is more difficult.

In most of the foreign law bonds, 75 percent of investors have to vote in favor of the deal to make it binding for all. However, in contrast to the Greek law bonds, the voting for the foreign law bond takes place separately for each individual issue. That means it is much easier for speculators to buy blocking majorities and derail the swap for certain bond issues.

Adding up the acceptances that have been announced publicly so far takes the participation rate to more than 48 percent, not counting others who may already have tendered their bonds without announcing so publicly.

In an effort to pile pressure on undecided investors, the Greek debt agency warned Tuesday that the country just does not have the money to repay holdouts in full. That means that if they do not accept the bond swap, they may face a full default, and therefore much steeper losses, on their bonds.

Venizelos on Wednesday also sharply criticized five Greek social-security funds that decided not to participate in the debt relief.

He said the five funds control only about euro3 billion worth of Greek debt but accused them of "undermining" the national effort to secure the deal, without which Greece will lose its international cash lifeline and likely be forced out of the eurozone.

"What kind of message are we Greeks sending?" he told private Real FM Radio. "Is our message that we prefer the country to go bankrupt and the social security funds' bonds to be totally wiped out? If (the bond swap) does not succeed, what will these bonds be worth? They will be worth a big zero. Because the country will have been wiped out."

Although Greece needs the bond swap to stay afloat, the debt relief deal and the bailout will not spell the end of Greece's – or Europe's – troubles. Analysts are divided over whether the country will be able to avoid default and stay in the euro in the longer term.

Greece has been living off a first euro110 billion batch of international rescue loans since May 2010 and has to implement stringent austerity measures in return. The country is in its fifth year of deep recession and unemployment has reached at a record high of 21 percent.

Even if the new rescue deal works out as planned, it would still leave Athens with a debt level of 120 percent of economic output by the end of the decade. To sustain that load, Greece will have to get its battered economy back into shape quickly and opposition to the reforms the EU says are required for that remains high.

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Paphitis reported from Athens, Greece. Elena Becatoros in Athens; Menelaos Hadjicostis in Nicosia, Cyprus; David McHugh in Frankfurt, Germany; and Igor Meglajec in Luxembourg contributed to this story.