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No Grexit, No Haircuts, But Difficult Negotiations Ahead

Financial markets let out a sigh of relief when they learned that the new Greek leftist government led by Prime Minister Alexis Tsipras has put aside its earlier demands that a large share of its debt be written down, that is, forgiven. Instead, the new Greek Finance Minister, Yanis Varoufakis, offered a surprise proposal of bond swaps. European rescue loans would be exchanged for debt linked to future GDP growth, and bonds now owned by the European Central Bank (ECB) would be exchanged for perpetual bonds, that is, bonds without a maturity date. This move takes imposed haircuts off the table. The possibility that Greece would exit the Eurozone ("Grexit") also now looks very unlikely. Greece does not wish to leave the Zone - the cost would be too great, and its Eurozone partners have indicated they want Greece to…