• Greek prime minister Lucas Papademos (L) and Finance Minister Evangelos Venizelos wait for …

Greece took Friday a critical step to avoid bankruptcy with an unprecedented debt write-off deal, allowing the head of the eurozone's finance ministers to say a second bailout was on track.

The event means that Greece is now set to repay debt soon due and has a second chance to rebuild its shattered economy, and that the eurozone has avoided default chaos that would have destabilised global markets.

European Union officials welcomed the largest debt swap ever undertaken with relief, but financial analysts warned that the Greek problem was simply contained, not buried.

"The Eurogroup considers that the necessary conditions are in place to launch the relevant national procedures required for the final approval of the euro area's contribution to the financing of the second Greek adjustment programme," Eurogroup head Jean-Claude Juncker said.

The finance ministers group held a conference call on Friday, and they were to meet on Monday in Brussels.

German Finance Minister Wolfgang Schaeuble said they had already released 35.5 billion euros ($46.6 billion) in funds to cover eurozone participation in the bond swap, and that the remaining 94.5 billion euros, essentially loans to Athens, will probably be released next week.

"We are not out of the woods but we have taken an important big step," Schaeuble said.

EU Economics Affairs Commissioner Olli Rehn said the result of the swap offer was a "decisive contribution to financial stability in the euro area as a whole."

he head of the International Monetary Fund Christine Lagarde said in Washington: "This is an important step that will dramatically reduce Greece's medium-term financing needs and contribute to debt sustainability."

A large majority of private holders of Greek debt agreed to cancel half the money owed to them, enough for the swap to go forward.

Greek officials said the swap would shave around 100 billion euros from its total debt of roughly 350 billion euros.

The successful debt deal was a key condition of the second bailout, with Greece's parliament having already approved a raft of required measures to help balance the budget and liberalise the economy.

The swap announcement came shortly before official data showed that the Greek economy, in deep recession, has shrunk even more than expected.

The state statistics agency said the economy had contracted by 7.5 percent in the fourth quarter of 2011, revising a previous 7.0-percent estimate.

On an annual basis, this meant output shrank by 6.9 percent, compared with a previous forecast of 5.5 percent.

The high level of acceptance by private creditors met criteria for the EU and IMF to push on with an even bigger bailout for Greece, and Athens said it would mop up remaining bonds affected by the exchange in the next two weeks.

"Seven billion euros remain in reality," Greek Finance Minister Evangelos Venizelos told a news conference a few hours after the finance ministry said creditors had tendered bonds amounting to 83.5 percent of the debt to be cut.

On the basis of full acceptance, Greece would secure a write-off worth 107 billion euros.

It is hoped that will keep Athens on track to reducing its debt to a sustainable level of about 120 percent of annual output by 2020.

Venizelos said all bonds issued under Greek law had been accounted for by virtue of legislation -- known as collective action clauses -- which enable Greece to force compliance on all investors based on the majority decision to participate. A government source later said the clauses had been activated.

Holders of bonds issued under foreign law, and of bonds issued by state companies guaranteed by Greece, will be given until March 23 to decide, the minister said, while warning that investors would be "naive" to expect a better offer.

Fitch Ratings then cut Greece to a "restricted default" rating, which Fitch said constitutes "a sovereign default event under the agency's distressed debt exchange (DDE) rating criteria."

Success of the debt swap is a vital step for Greece to avoid a default as early as March 20 when it has to repay more than 14 billion euros in debt.

A default would be catastrophic for Greece, and could cost the eurozone up to one trillion euros and send shockwaves through global financial markets.

European shares closed moderately higher a day after sharp rallies on anticipation of the deal. The euro eased to $1.3115 from $1.3274 late on Thursday.

Anita Paluch, a trader at Gekko Global Markets in London reflected a widespread analyst view: "It (is) not that all the problems are gone, as this is just the beginning of the road to recovery."

The use by Greece of legal steps to force acceptance by recalcitrant bondholders could trigger anti-default insurance contracts, known as credit default swaps.

The German association of small investors SdK said Friday that it was considering a complaint against Greece for use of the collective action clauses.