Greece close to averting Eurozone crisis

Greece has come came close to negotiating a deal that could have major ramifications for the ensuing financial crisis in the Eurozone.

With major debt repayments of €14.5 billion due in March, Greece is currently on the verge of an agreement with major creditors that could wipe out up to 70% of its debts.

A restructuring of the debt mountain would see an interest rate of 3.1% (rising to 4.75%) on new long-term bonds created from the €355 billion that it owes.

After a week of negotiations, it is not yet clear whether all major lenders and bondholders will agree to the deal. Small hedge funds that have bought bonds in recent months may refuse to cooperate.

For Greek politicians to rewrite the terms of the debt contracts could create further financial instability in the Eurozone just as the negotiations seek to stabilise it. Similarly, if creditors refuse the deal, the EU may have to increase a rescue package to prevent Greece defaulting in March.

If the deals are successful, however, a breakthrough for Greece could reduce the pressure on other vulnerable European economies and encourage greater confidence in the banking system across Mediterranean countries. Italian and Spanish banks suffered huge outflows last year as concerned customers withdrew over €100 billion from their bank accounts.

The UK was exposed to $14.6 billion of Greek debt towards the end of 2011. This pales in comparison with the exposure faced by France and Germany, but any financial collapse and subsequent recession throughout the Eurozone would have dire consequences for the UK economy.

Ashley King