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A third bailout for Greece seems inevitable

March 12, 2012: 12:07 PM ET

The debt restructuring last week was deemed a success, but if Greece continues in its current state with no outside economic stimulus, it will burn through that 130 billion euros in no time.

By Cyrus Sanati, contributor

FORTUNE -- French President Nicholas Sarkozy declared Friday that the long-running Greek debt "problem" had finally been "solved," following the successful implementation of a massive debt restructuring in the country. But while the restructuring was more successful than many had anticipated, even with the triggering of credit default swaps, Greece's debt woes, as well as those of the rest of the eurozone, are far from over. A longer-term and more robust solution will be needed before the "Mission Accomplished" banner can truly be rolled out on this long-running debt crisis.

The debt exchange that finally came to a head on Friday could serve as a template for future restructurings involving other peripheral eurozone members, like Portugal and Ireland. It was months in the making. Creditors, politicians, banks and bureaucrats from around the globe debated the issue ad nauseam until an agreement was put in place that would allow Greece to avert a humiliating hard debt default that would have jeopardized the stability of the euro.

The key decision was the one made to force Greece's private bondholders to take a major hit to help finance the nation's recovery. All-in-all, the private bondholders ended up receiving new bonds worth 73% less than what they had before, effectively wiping out 100 billion euros off the nation's burgeoning debt load. Greece received 130 billion euros ($170 billion) in fresh capital from the European Union and the International Monetary Fund to help fund their future debt payments, which will also serve to keep the lights on at the Acropolis.

MORE: 5 ways to transform Greece's economy now

Not everyone was on board, however. European authorities said that 95% of the Greek bondholders would need to agree to the debt swap, but only around 83% of Greece's creditors ended up voluntarily going along with the swap. To get to the 95%, Greece enacted collective action clauses, or CACs, which forced the errant bondholders to accept the decision of the majority and therefore agree to the swap.

Triggering the CACs helped secure the 130 billion euros for the Greek Treasury, but it also turned the debt swap from a voluntary exchange to a "credit event." Later on Friday, a council of banks and asset managers ruled that since Greece had enacted the CACs, it had officially defaulted on its debts, triggering credit default swaps that banks and hedge funds had acquired to protect themselves from such an event.

Winners and losers (and bigger losers)

Many investors believed that the triggering of CDS would cause total pandemonium in the markets, but, luckily, the notional value of the swaps outstanding against Greek debt amounted to just 3.5 billion euros, a small fraction of the total value of Greek debt outstanding.

CDS contracts are written by banks and passed amongst hedge funds, asset managers and other banks like hot potatoes, so it's tough to know exactly who is holding what at any given moment. But there is already some talk of winners and losers on the CDS front. The big loser at this point seems to be KA Finanz, the Austrian bank. It said on Friday that it could have a 1 billion euro exposure to Greek CDS. Meanwhile, data from the European Banking Authority suggests that UniCredit, the large Italian bank, could be on the hook for 240 million euros, while Deutsche Bank (DB) and BNP Paribas, might need to pay out 77 million and 74 million euros, respectively.

MORE: Meredith Whitney was right

On the flip side, there are a few banks that could benefit from the CDS triggers as they bought protection in case of a default. HSBC, the British bank, may have racked up nearly 200 million euros, while RBS, another British bank, and minted 174 million euros. A number of hedge funds are expected to be big beneficiaries, but it is still unclear who the big winners are at this point.

The losses on the CDS contracts pale in comparison to the 100 million euro haircut that Greek bondholders will suffer. Most of the losses will impact the large Greek banks as they hold around half of Greece's sovereign debt. Luckily, the European Central Bank has opened the spigot and is lending money at near zero percent to member banks to keep them well capitalized. Other European banks should be able to absorb Greek losses as they have had years to build up their loan loss reserves in anticipation of such a credit event. Many have already written down the value of their Greek debt by as much as 75%, so they should be able to make it through the next few weeks without needing to raise additional capital.

Greece's future

So now what of Greece? The country was forced to make draconian cuts in government spending to secure the 130 billion euros, which should plunge the country further into an economic depression. Greek GDP fell 7% in 2011 and is in total free fall. General unemployment just hit 21% and youth unemployment just hit 51%. Both are expected to rise as the nation is forced to fire thousands of government workers to pay off its debts. Greece is now using nearly all of the cash it takes in from taxes to service its debt. If the country continues in this current state with no outside economic stimulus, it should burn through that 130 billion euros in no time. A third bailout seems inevitable.

But there are some things Greece can do to raise some more revenue. For starters, it can finally get serious about selling off state assets. From excess land to utilities, the Greek government has a large portfolio of assets that can be liquidated. That money can be used to create job training programs or could be used as grants for small businesses. This will help grow the economy, which should bring in more revenue to help the country service its debts.

MORE: The lure to leave the euro may prove irresistible

In addition to selling assets, the Greeks should be seeking more grants from the EU and its neighbors and forgoing any new debt. This past weekend, Greek officials said that they would be seeking 1 billion euros in financing from the European Investment Bank. But more debt seems like a mistake. After all, while the restructuring did chop 100 billion euros off the nation's debt load, it also added 130 billion euros of fresh debt. In effect, the debt swap simply shifted Greek debt out of private hands and into public hands. The net effect on the Greek economy is basically the same, in fact, it's worse, as it adds another 30 billion euros to the pile. Greece needs growth, not more debt.

The eurozone members can either watch Greece limp along and come begging for another bailout in a year or so, or they can do something to stabilize the situation. For example, Greece is entitled to 20 billion euros in EU structural fund grants from 2007 to 2013, of which they have used just 8 billion euros. The EU should release the remaining 12 billion euros to Greece immediately to help the country invest in some job-stimulating ventures. While 12 billion euros will barely move the needle in some economies, it could make a mark in Greece.

But eventually Greece will need more grants to help stimulate its economy. That means that its northern eurozone neighbors will need to open their wallets and actually give instead of lend money to Greece. While that may be politically unpopular, especially in the Netherlands where talk of leaving the euro has been growing, it may be the best hope to keep the eurozone together and finally put an end to this seemingly never-ending crisis.

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