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Armageddon avoided -- for now

News that more than 85pc of Greek bondholders have accepted proposals to write off half of the amount owed to them means that the prospect of a eurozone member country going bust, with all the consequences this might entail, has been averted, at least for now.

Under the proposals agreed by the bondholders yesterday, they will take a nominal 50pc "haircut" and a longer repayment period. When this longer repayment period is taken into account the economic loss to the bondholders is a swingeing 75pc.

The plan will see Greece's debt mountain reduced by about €100bn to "only" €250bn.

That's the good news. The bad news is that, even after stiffing the bondholders, virtually no one outside the EU and ECB seriously believes that the €130bn Greek bailout plan, which imposes savage cuts and tax increases, has any realistic chance of working. Even if, and that will almost prove to be a very big "if", Greece meets all of its targets the country will still have a debt/GDP ratio of over 120pc in 2020.

Yesterday's deal merely buys time.

And maybe not even too much of that. This is because although private bondholders have endured a savage haircut, easily the most severe imposed by any Western European country since the immediate aftermath of the Second World War, the ECB and other official lenders have escaped unscathed.

What this means in practice for the Greek and other EU/IMF bailouts is that private bondholders, who thought that they were at the head of the queue, have been "crowded out" by official lenders such as the EFSF, the IMF and the ECB. What bondholders thought was top-notch sovereign debt has been transformed into junior junk.

We are already seeing the consequences of this. Portugal, widely expected to be the next eurozone country to impose a haircut on its bondholders, has seen yields on its bonds soar to over 13pc as bondholders sell before they too are subjected to a Greek-style haircut.

If, or more likely when, Portuguese bondholders are also shorn the markets will inevitably begin to speculate on which other countries are most likely to do likewise. At the moment the most likely candidates are Spain or Italy but we in this country could very easily find ourselves being drawn back into the firing line.

While Irish bond yields are now back under 7pc, it might not be a good idea to bet on this happy situation continuing indefinitely. A fresh shock, a No vote in the fiscal compact referendum, a Portuguese haircut, a Greek default, would be more than sufficient to trigger a fresh crisis in this country.

With an eventual Greek default still likely we in this country must not rest on our laurels. It is only by bringing the public finances firmly under control that we can hope to escape from the troika clutches and regain control over our own destiny.

Irish Independent