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It has taken many maneuvers on the part of the International Monetary Fund and the euro zone to arrange a plan to make Greece’s debt more sustainable, and the process is not yet complete. However, even though Greece’s bond buyback narrowly fell short of its 30-billion-euro target, the country’s foreign lenders have determined that it was a success.
As both Germany and the IMF have agreed that the buyback fulfilled its designated goal to lower Greek debt, the country is close to receiving its next tranche of relief funds, approximately 34 billion euros, to recapitalize its struggling banks. In a letter seen by Reuters, Germany’s finance ministry stated that the buyback had ensured that Greek debt was sustainable.
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But a problem remains. Because of the shortfall, Greece was forced to spend 1.29 billion euros more than the 10 billion lenders designated for the country to buy back the 31.9 billion worth of bonds tendered in the deal. As a result, Greek debt will fall to only 128 percent of gross domestic product in 2020, as opposed to the 124 percent that the euro zone and the IMF determined to be a manageable level. However, German ministers have said that debt could still drop to the 124 percent level if the interest Greece pays on its rescue loans is reduced or if a new buyback for bondholders who did not participate in this debt restructuring is scheduled.
The buyback also brought a new set of problems for the country’s financial institutions. Greek banks, according to Reuters, contributed most of their bond holdings to guarantee that the buyback was successful. But because of their participation, they could incur losses of up to 2 billion euros, as Greek central bank chief George Provopoulos told lawmakers.
With the buyback complete, analysts have noted that the threat of Greek bankruptcy, which has hung over the financial markets and the European Union for months, has lifted. “There was a lot of skepticism a few weeks ago that they would manage to do this at all,” said SGH Macro Advisors CEO Sassan Ghahramani to Reuters.
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