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Greece's debt: What happens if deal fails?

Greece debt default looms if 75 percent of debt-holders don't go along with the negotiated restructuring plan. Even so, market reaction to a disorderly default on Greece's debt could be minimal.

By Catherine BoyleStaff Writer, CNBC.com / March 7, 2012

A worker cleans paint thrown by anti-austerity protesters at the facade of the Bank of Greece in central Athens Tuesday. Greek officials say they have no plans to extend the March 8 deadline on their bond swap offer to private creditors that would restructure Greece's debt.

Yannis Behrakis/Reuters

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Greece has come back to the forefront of the markets’ agenda over concerns about its debt restructuring package, with fears that the troubled euro zone country may finally default on its debt repayments.

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Yet many in the market believe that, even if the deal fails to achieve its goal of getting 90 percent of its bondholders on side (which looks increasingly likely), the effect on markets would be minimal.

 The possibility of a default on Greece's debt has hung over global stock markets for many months now.

“Everyone knew it was going to default a year ago,” Peter Toogood, head of investment at Old Broad Street Research, told CNBC Wednesday. “Portugal and Ireland will need another bailout too. These are evolving programs of austerity and bailouts.”

 On Tuesday, Greece made it clear that it would not pay bondholders who refused take part in the debt swap program in an effort to sway those who are still undecided.

 Hedge funds are believed to form a large part of the bondholders who are digging their heels in.

 If participation falls below 75 percent, the second bailout is likely to fail and Greece could default, leaving its creditors — including the “troika” of theInternational Monetary FundEuropean Central Bank, and the European Commission — with hefty losses on its debt.

If Athens cannot sign up the required 90 percent of bondholders needed to push through the debt haircut and bailout, it may have to use new legislation for Collective Action Clauses, or CACs.

In either of these scenarios, credit default swaps, the insurance investors use to hedge against debt defaults, on Greek debt could be triggered — which may spark a feared market panic.

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