Europe seals new Greek bailout to avert default

(Reuters) - Euro zone finance ministers sealed a 130-billion-euro ($172 billion) bailout for Greece on Tuesday to avert a chaotic default in March after persuading private bondholders to take greater losses and Athens to commit to deep cuts.

After 13 hours of talks, ministers finalized measures to cut Greece's debt to 120.5 percent of gross domestic product by 2020, a fraction above the target, to secure its second rescue in less than two years and meet a bond repayment next month.

By agreeing that the European Central Bank would distribute its profits from bond buying and private bondholders would take more losses, the ministers reduced the debt to a point that should secure funding from the International Monetary Fund and help shore up the 17-country currency bloc.

But the austerity measures wrought from Greece are widely unpopular among the population and may hold difficulties for a country which is due to hold an election in April. Further protests could test politicians' commitment to cuts in wages, pensions and jobs.

Every government in the currency union will also have to approve the package. Northern creditors, such as Germany, had pressed for even tougher measures to be placed on Greece, but Finance Minister Wolfgang Schaeuble said he was very confident a majority in parliament would approve the package.

"We have reached a far-reaching agreement on Greece's new program and private sector involvement that would lead to a significant debt reduction for Greece ... to secure Greece's future in the euro area," Jean-Claude Juncker, who chairs the Eurogroup of finance ministers, told a news conference.

The euro gained in Asia after the bailout was agreed.

Some economists say there are still questions over whether Greece can pay off even a reduced debt burden.

A return to economic growth could take as much as a decade, a prospect that brought thousands of Greeks onto the streets to protest on Sunday. The cuts will deepen a recession already in its fifth year, hurting government revenues.

"We sowed the wind, now we reap the whirlwind," said Vassilis Korkidis, head of the Greek Commerce Confederation. "The new bailout is selling us time and hope at a very high price, while it doggedly continues to impose harsh austerity measures that keep us in a long and deep recession."

EXTRA RELIEF

A report prepared by experts from the European Union, European Central Bank and International Monetary Fund said Greece would need extra relief to cut its debts near to the official debt target given the worsening state of its economy.

If Athens did not follow through on economic reforms and savings to make its economy more competitive, its debt could hit 160 percent by 2020, said the report, obtained by Reuters.

"Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it," the nine-page confidential report said.

The accord will enable Athens to launch a bond swap with private investors to help put it on a more stable financial footing and keep it inside the euro zone.

About 100 billion euros of debt will be written off as banks and insurers swap bonds they hold for longer-dated securities that pay a lower coupon.

Private sector holders of Greek debt will take losses of 53.5 percent on the nominal value of their bonds. They had agreed to a 50 percent nominal writedown, which equated to around a 70 percent loss on the net present value of the debt.

Juncker said he expected a high participation rate in the deal, but some bondholders may balk at the new terms.

Greece said it would pass legislation that would allow it to enforce losses on bondholders who will not take part.

Euro zone central banks will also play their part in reducing the debt.

A Eurogroup statement said the ECB would pass up profits it made from buying Greek bonds over the past two years to national central banks for their governments to pass on to Athens "to further improve the sustainability of Greece's public debt."

The ECB has spent about 38 billion euros on Greek government debt that is now worth about 50 billion euros.

The private creditor bond exchange is expected to launch on March 8 and complete three days later, Athens said on Saturday. That means a 14.5-billion-euro bond repayment due on March 20 would be restructured, allowing Greece to avoid default.

The vast majority of the funds in the 130-billion-euro program will be used to finance the bond swap and ensure Greece's banking system remains stable; some 30 billion euros will go to "sweeteners" to get the private sector to sign up to the swap, 23 billion will go to recapitalize Greek banks.

A further 35 billion or so will allow Greece to finance the buying back of the bonds. Next to nothing will go directly to help the Greek economy.

($1 = 0.7538 euros)

(Additional reporting by Luke Baker, Julien Toyer, Robin Emmott in Brussels, Daniel Flynn in Paris, Terri Kinnunen in Helsinki, Sarah Marsh in Berlin, Harry Papachristou in Athens; Writing by Mike Peacock and Elizabeth Piper; editing by Timothy Heritage)