Greece success in bond deal but not in solving debts

European leaders claimed victory after Greece successfully completed a €206 billion (£172.3 billion) bond swap, even though it triggered the default they were desperate to avoid.

After a marathon seven-hour meeting, last night (Friday) the International Swaps & Derivatives Association (ISDA) dramatically declared a "credit event had occurred" and billions of euros of credit default insurance will have to be paid out. The credit default swap (CDS) market is opaque but analysts estimate the ruling will cost European banks around €3.5 billion.

Even so, bankers were relieved by the decision - the opposite call could have undermined investor confidence in the entire CDS market.

Before the ISDA decision, Greece was declared to have technically defaulted. A total of 85.8% of Greece's international creditors approved the restructuring deal which will reduce the value of their investments by 75%. But the government said it would activate the controversial Collective Action Clauses (CACs) to impose the losses on bondholders who had not voted for the deal.

Despite chaotic confusion over the details, Wolfgang Schaeuble, the German finance minister, said it was an "historic opportunity for the country" while Nicolas Sarkozy declared the Greek "problem is solved". Lucas Papademos, Greece's technocratic interim prime minister, said the "largest restructuring ever made" had delivered Greece from the "quicksand of the past months...onto solid ground." He pledged that Greece understood the "significant damage" unleashed on investors and that it had "no right to squander" the debt it had been forgiven. He vowed to "modernise the country, make our economy competitive, and tidy up the state."

Experts warned the deal had failed to addresses Greece's crippling debt problem. Instead, by imposing heavy losses on Greek banks and pension funds, it may have destablised the country even more. Raoul Ruparel of Open Europe said: "The debt relief for Greece is far too small which means another default could be around the corner, while the austerity targets are whole unrealistic and will kill off growth prospects."

The eurogroup of 17 finance ministers held a conference call but said they would not decide whether to release Greece's €130 billion bail-out until a meeting on Monday. The restructuring will write down Greece's debt by €105.4 billion, is €2 billion short of the target set by its international paymasters. The shortfall is expected to be made up by completing the rest of the restructuring - around 14% of the bonds were issued abroad and have an extended deadline.