Greece moved closer on Thursday to concluding a bond swap with private creditors that it needs to stave off an immediate messy default and buy time to repair its exhausted economy.
Athens must secure the deal as part of a financial bailout that will allow it to redeem debt coming due in less than two weeks. Missing that repayment would potentially destabilize the euro zone's financial system and undermine the euro.
Investors holding at least 61 percent of the total 206 billion euros (173 billion pounds) in debt have already signed up well before the 8 p.m. British time deadline. Some Greek media have cited higher figures.
This means Greece has crossed the minimum 50 percent required for a deal and was almost certain to top the two-thirds level needed to enforce losses on any holdouts.
The pace of responses to the bond offer is good, the percentage of bondholders tendering voluntarily is very high, a government official, who spoke on condition of anonymity, told Reuters. It is going well, we are optimistic, he said.
Financial markets picked up on the optimism, with bank stocks rising sharply and the risk premium on Italian and Spanish government bonds falling as investors hoped a Greek deal would curb the likelihood of default in other weaker euro zone economies.
Major banks and pension funds have supported the offer, accepting losses of as much as 74 percent on the value of their investments as part of a deal aimed at cutting more than 100 billion euros from Greece's crippling debt.
One of the chief negotiators for the bondholders, Charles Dallara, said he was optimistic the swap would succeed and predicted a very high participation rate, though he was unsure if it would hit the 90 percent level Greece is aiming for.
Italy would be among the next wave of countries in the firing line if Greece defaulted and Prime Minister Mario Monti also noted that acceptance had topped 60 percent.
The private sector is moving towards the 65 percent level, which suggests a solution is very close, Monti said during a visit to Serbia.
Results of the exchange are expected to be announced on a Greek finance ministry website at 6 a.m British time on Friday.
If all goes well, tomorrow we will be able to announce that a debt burden of 105 billion euros has been lifted from the Greek people, Finance Minister Evangelos Venizelos told parliament. For the first time we are cutting debt instead of adding to it.
The European Union and International Monetary Fund have made a successful bond swap a pre-condition for final approval of the 130-billion-euro bailout agreed last month and ministers will decide whether to clear the package in a conference call on Friday afternoon.
Provided over two thirds of those who respond accept, Greece is expected to use so-called collective action clauses (CAC) to enforce the deal on all holders of the 177 billion euros in outstanding debt regulated by Greek law.
The acceptance will likely end up close to 80 percent and then CACs will be activated, after Greece consults with the Eurogroup, predicted a senior banker, who declined to be named. Numbers are building up as they usually do on the last day.
Separate conditions cover the remaining 10 percent or so of bonds regulated by English and international law, leaving scope for a legal battle by some of the hedge funds holding out against the swap offer.
It also remains to be seen whether credit default swaps (CDS) which some investors have taken as insurance against a forced restructuring of the debt will be paid out.
Euro zone debt crisis graphics http://r.reuters.com/hyb65p
Greece must have the bailout deal cleared by March 20 when some 14.5 billion euros of bonds are due.
I expect the bond swap will go well, said one senior banker who declined to be named. The baseline scenario is that CACs will be used but at the end of the day it's the final result that counts, securing the country's funding package.
Athens has staggered from deadline to deadline since the crisis broke out two years ago and several of its international partners have expressed open doubts about whether its second major bailout in two years will be the last.
Underlining the severe problems facing Greece after five years of deep recession, data on Thursday showed unemployment running at a record 21 percent in December, twice the euro zone average, with 51 percent of young people without a job.
There has been growing resentment in Greece over the austerity medicine ordered by international creditors which has compounded the pain from a slump which has seen the economy shrink by a fifth since 2008.
But Athens, totally reliant on international support to stave off a default that could set off a severe banking crisis across the euro zone, has also infuriated both the EU and the IMF with its repeated failure to push through promised reforms.
We have shown a lot of solidarity with Greece, German Finance Minister Wolfgang Schaeuble said late on Wednesday. Everyone knows that the real problems of Greek society are in Greece and not abroad.
(Additional reporting by Harry Papachristou and Angeliki Koutantou, writing by James Mackenzie; editing by Anna Willard)