The Greek Debt Buyback 'Boondoggle' - Questions Answered

Tyler Durden's picture

The last few weeks have seen the market increasingly price in the probability of a Greek debt buyback. Following this week's 'failed' Eurogroup meeting that chance has risen even more as leaked details suggest a debt-buyback is becoming the corner-piece of the 'new' deal. The leaking of details (and anticipation by the market) has driven GGB prices up and reduced much of the benefit of the buyback 'boondoggle' and as Barclays notes, "even if the debt buyback enables the IMF and EU leaders to come to an agreement, leading to a Greek resolution in the near term, in the medium-to-long-term Greek debt is not sustainable on realistic macroeconomic assumptions without notable outright haircuts on official EU loans to Greece. Therefore, a successful debt buyback might resolve the Greek debt sustainability issue on paper in the troika report but it will most likely not resolve it in investors’ minds." While there are 'optical' advantages to the buyback, the four main disadvantages outlined below should be irksome to the Greeks - which is critical since, as ekathermini notes, a senior finance minister commented "God forbid we should not be close to an agreement on Monday."


The full piece is worth a read (and Bulo/Rogoff's details on sovereign debt buybacks) but for those pressed for time between holiday shopping stores - read sections 4, 6 (Optics), 7 (The Disadvantages) & 8 (Reality).

Via Barclays:

1. Why has the buyback programme gained traction recently?

There have been months of discussion between Greece and the ‘troika’ (the European Commission, IMF and ECB), aimed at adjusting the current Greek programme such that the next €44bn disbursement could occur. Furthermore, all of the troika’s additional reform requests have been approved by the Greek parliament. As such, the focus is no longer on the relationship between Greece and the troika, but rather, it has shifted to disputes within the troika, between the IMF and European leaders, on how to fill the financing and more importantly the debt sustainability (DSA) gap. A debt buyback is now expected to form an important part of the latter.


2. What progress is being made on the dispute between the IMF and European leaders?

The primary disagreement between the IMF and European leaders is on how to fill the DSA gap. Under the new 2y extended Greek programme, the IMF still wanted to see Greek debt reduced to 120%, with additional adjustments from 144% of GDP in 2020 without any adjustments. In the absence of outright haircuts on EU loans to Greece, this is a very difficult task to achieve. However, European leaders, particularly in Germany, insist that politically and legally, outright haircuts are impossible to accept at this stage. After this week’s troika meetings, it seems that the dispute between the IMF and EU leaders has eased somewhat. Reuters reported on Friday morning that the IMF has increased its debt-to-GDP target for Greece to 124% by 2020. Moreover, recent comments from Schaeuble and Weidmann have not ruled out future compromise in the form of haircuts on EU loans, depending on the progress of the Greek government reform implementation. In the meantime, EU leaders are aiming to hit the new IMF DSA target level by 2020 with a mix of measures, such as the ECB giving up profits on its SMP and investment portfolio holdings, reduced interest on EU bilateral loans to Greece and a debt buyback programme. We summarise in Figure 1 our best estimates of how the troika is expecting to fill the financing and DSA gaps under the new Greek programme. Note that some DSA gap still remains to be filled, according to our estimates.



3. What size of buyback programme is under consideration?

This week’s Eurogroup meeting on Greece implied that Europe is willing to contribute a further €10bn from the EFSF to the extended Greek programme. And the cash needed for the buyback is planned to be the same amount. This suggests to us that this new EFSF money will most likely be used for the buyback execution. While these new funds should constitute the bulk of the buyback cash needed, some of the ECB profits can also be used to contribute too. The outstanding size of the post PSI bonds is €63bn. An average purchase price of 25, 35 and 50 cents on the euro implies €40bn, €29bn and €20bn of nominal purchases with 15pp, 9pp, and 5pp of GDP debt reduction, respectively.

4. What form will the buyback take, and is it feasible to accept a 10pp of GDP debt reduction from it?

So far, there has been no official information on the debt buyback. It could be a fixed price offer or a competitive reverse auction. The fixed price offer should give all investors the same price on a voluntary basis. In order to achieve a reasonable level of debt relief, we think this price should be no more than 35cents on the euro. Currently, we estimate around €20bn of the €63bn outstanding post PSI Greek bonds are held by the Greek banks and other domestics. These domestic investors, particularly the banks, will most likely have an agreement with the government and fully participate. The rest of the Greek bondholders are probably international investors such as banks, hedge funds, real money managers, insurance and pension funds. The current Greek strip average price is 28. While some hedge funds might still not find a 35cent fixed price deal attractive, as long as domestic investors fully participate, it is quite possible that nominal purchases ultimately come close to €30bn.  

Alternatively, the Greek Treasury might hold a reverse competitive auction, in which domestic investors and banks are indirectly encouraged to accept a 30cent price whilst international investors would sell their holdings of up to €10bn at prices up to 45cents on the euro, which can still achieve an average purchase price of 35cents on the whole auction.

However, we think this competitive reverse auction might lead to political issues later on, as there could be questions asked over fair treatment, in the sense that domestic private investors would have to compromise to the benefit of other investor groups, As such, we believe the probability of a competitive reverse auction is very low, making the former fixed price option much more likely.

5. Can the collective action clauses (CACs) be used as part of the buyback?

With the aim of achieving the highest possible debt relief for Greece, it seems that politicians have also discussed using CACs as part of the buyback offer to force a low price deal on all private investors. Given the PSI involving private investors early in the year, we believe a second coercive debt buyback could have a very negative impact on sentiment. Indeed, this option seems to have quickly lost favour with officials. As such, we see the probability of coercive debt buyback via usage of CACs as very low. In any case, a credible threat from using CACs will be much lower now as the PSI bonds are under international law, whilst pre-PSI bonds were under domestic Greek law.

6. What are the benefits of the debt buyback?

Optically, the debt buyback provides debt relief, in the order of 10pp of GDP if an average purchase price of 30cents on the euro can be achieved. It will also provide very limited financing relief of €2.4bn over the new programme period (until end of 2016) via the interest payment cancellation on the potential €30bn nominal debt bought (the coupon on this debt is 2% flat across the Greek strip). Most importantly, if executed successfully it will most likely help to form some common ground between EU leaders and the IMF to move on with the Greek issue in the near term.

7. What are the disadvantages?

Previous debt buybacks show that secondary market prices rally significantly up to the actual debt buyback offer. As a result, by the time the buyback occurs, debt relief due to price action is much lower than originally expected. As such, we think a large part of the rally in Greek bonds that has occurred since the end of the summer is due to debt buyback anticipation-related buying, which resulted in average Greek strip price appreciation of 75% since mid August. The average market value of €63bn of Greek debt was €10.2bn in mid August; however, at 35cents on the euro, the post debt buyback market value of €30bn of nominal debt will still be around €10.5bn. Therefore, this typical price appreciation in anticipation of the debt buybacks in most cases makes debt buybacks a creditor-subsidising experience.

Secondly, even if an average 35cent purchase price is achieved in the debt buyback operation, as we mentioned above, up to €20bn of the participation has to come from domestic banks, which would mean up to €15bn recapitalisation needs for the Greek banking system, which has to come from EU loans. Unless officials have a way to handle additional recapitalisation needs of the Greek banking system as a result of the buyback, the optical debt relief might even be cut further.

Third, as highlighted in “The Buyback Boondoggle” by Bulow and Rogoff, when a corporate spends resources on a buyback operation, it typically uses assets that otherwise could be seized in the event of default, which makes the deal more attractive to the borrower. However, €10bn of money that will be used by Greece for the buyback could otherwise be used for investment and other growth-generating measures, which might well have been more helpful for Greece in the medium to long term.

Lastly, even if the debt buyback enables the IMF and EU leaders to come to an agreement, leading to a Greek resolution in the near term, in the medium to long term Greek debt is not sustainable on realistic macroeconomic assumptions without notable outright haircuts on official EU loans to Greece. Therefore, a successful debt buyback might resolve the Greek debt sustainability issue on paper in the troika report but it will most likely not resolve it in investors’ minds.

8. Where does the debt buyback leave Greece and Europe from a medium- to long-term perspective?

A successful debt buyback will most likely pave the way for a resolution of the disputes within the troika and lead to the disbursement of the next tranche of around €44bn. However, as mentioned in the previous answer, even a successful Greek debt buyback wouldn’t come close to achieving a sustainable Greek debt position. And, as long as the debt sustainability issue remains outstanding, private investment will be limited, and the tax evasion and capital outflow situations are unlikely to improve. All of which will have negative growth implications. The longer growth remains weak, the more fiscal consolidation will probably be demanded of Greece by EU leaders, which might at some stage lead to further social unrest, potentially even followed by collapse of the already troubled existing government. While Germany’s plan is probably to delay any outright haircut on loans until after German elections in 2013, delaying to deal properly with Greek debt sustainability might create the above mentioned scenario before then. Therefore, it is even questionable whether the debt buyback would even buy the time that European politicians are hoping for before deciding on the end-game for Greece.



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Dareconomics's picture

Greek debt is not sustainable under realistic GDP projections. Only under the IMF's fictitious optimistic GDP forecasts does Greece come close to achieving a 124% debt to GDP ratio by 2020:


The buyback is just another cynical ploy by the troika to delay the Greek default so that it does not affect German elections:

knukles's picture

Let's go over this One Fucking More Time.
Greece issues bonds, say at 100. 
Bonds drop to say, 20 since they turned to shite.
Owner with 80 point loss hasn't booked decline to market since still holds bonds and says they're really gonna be money good. (Ha ha)

So now we're at the point where Greece goes into open market and buys bonds at say, 30.  Seller books 70 point loss



I can't book that loss, it'll wipe out my (insert problem such as capital, anal gland, expense account....)

But The Bonds Are Good And That's Why I want Out at Any Price But But Not Realize the Loss
(soft sobbing sounds)

EBC says.... waiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiit....

Ah, it'll work out just fucking fine...
Boopsie, book me a meeting and dinner,,,,

Gives All New Meaning to Hope and Change

Everybodys All American's picture

This will be the end game for any further private investment in the bonds of European sovereigns if this comes to pass. These haircuts will damage any participants severely and will set a nasty precident.

piliage's picture

If you are Blackrock sitting on these bonds, why the hell would you sell at 30? You've got the EU by the balls, you probably bought these with pennies, and you lose virtually nothing if you write them off. As long as the ECB isn't willing to write down their debt, there aren't many places the EU can go shopping these days to lower Greek exposure.

The wise guys who bought these junk bonds are laughing their arses off right now.

MillionDollarBoner_'s picture

So Europe is all fixed now, then...?

Should be good for +100bp on the S&P.

I'm off to load up on stawks :O)

GetZeeGold's picture



Move that pile of crap to there.....shove that pile of crap over there.


Throw a little more crap on the piles.......there you go.....all fixed.

falak pema's picture

either way the banks burn, they are destined to know the fate of the Templars; Island of Jews, Paris 1314.

Flounder's picture

Who the fuck is going to take this shit?

"A Greek official with knowledge of the buyback plan said any offer could be around 30 cents to the euro but has yet to be firmed up. "We are all kind of nervous about this," the Greek official said. "This [the buyback] will be on a totally voluntary basis so the more prices go up, the less benefit the plan will yield."

"The rally in outstanding Greek bonds has made any buyback plan more expensive, eroding the impact it would have on Greece's debt."

CPL's picture


Something going on with IKEA.  20th article I've seen about governments buying up their equity for shitty single use, flat packed stick furniture.

Almost Solvent's picture

Don't worry, Pants McPants will fix it. 


He has an answer for population control that translates into a fix for everything. 



eigenvalue's picture

Why people would participate in the buyback program while the PSI bonds are international law ones? The current Elliot VS Argentina case can give people some useful advice. 

In my opinion, the Greek endgame would start from the domestic politics in Greece. The current Greece coalition government would collapse in the foreseeable future and Syriza would be voted into office. As long as Tsipras the dickhead kept his words, we might see the new Greek government refuse to implement all the austerity measures, which would provoke the Troika into cutting the funding. 

At the moment, I'm quite flabbergasted to see no German politicians use the anti-bailout sentiment within Germany to challenge Merkel. Perhaps the Germans are too focused on domestic issues now to care about their money being squandered on Greece. 

Ajas's picture

Indeed I think someone in Argentina has read this paper quite carefully, particularly the section on the Mexican $10B repurchase to subordinate hold-outs:

"Why did the deal flop?  The key reason appears to be that investors did not believe Mexico's promise to treat the new bonds as senior.  The seniority problem is a fundamental one in sovereign debt contracts and not peculiar to the Mexican one."

Not gonna make that mistake twice.


MillionDollarBoner_'s picture

Ah, but...their "money" is not being squandered on Greece.

None of the "money" from the Troika gets to the Greek people. The majority of it is channelled through to German and French banks, which keeps them alive. The balance is siphoned off by the Greek elite/politicos. 

Georgiou Sixxpaxx don't get nish.

Remember to always "follow the money" ;o) 

CrashisOptimistic's picture


Look at the original chart.  All this bullshit is just to camouflage 9.8 billion euros with 10 billion of new money.  It doesn't touch all the items the report says have to be fixed.  

This doesn't do anything for long term, medium term OR SHORT TERM.

It's bullshit, and these analysts have somehow decided that when the Dutch said NO NEW MONEY, it means EXCEPT FOR ANOTHER 10 Billion.

If Greece needs another 40 billion, (and note this isn't a grant, it's a loan), then have them increase taxes and cut spending 50 billion, endure the further GDP cut and maybe net the 40 billion.

What in the HELL do these people think is going to happen if they keep lending them more money, suspending the interest payments and then lend them some more?  They are all stuck in the mindset of "it will work out eventually".  Why can't they embrace the idea that IT'S NOT GOING TO WORK OUT EVENTUALLY.  THE PARTY IS OVER.


BTW, Tyler, note how this guy has his post PSI private loan total at 60some billion, not your 113B?  Converging to my 46.5B, aren't we?

eigenvalue's picture

Do you really believe those politicians words? The Dutch politicians said no more money but that was BEFORE the election. Politicians often lie, including those Dutch ones. 

magpie's picture

What a funny war, Winston Churchill and Mahatma Ghandi fighting to stick white people into concentration camps

Joe A's picture

"But the Boer War concentration camp system was the first time that a whole nation had been systematically targeted, and the first in which some whole regions had been depopulated. Over 26,000 women and children were to perish in these concentration camps." The Brits applied a policy of scorched earth destroying farms and killing livestock, poisoning of wells, salting of fields, etc. The Brits have attacked 9 out of 10 countries of the world in the past and are still proud of it:


piliage's picture

Do these British invasions include Herman's Hermits and The Troggs?


MillionDollarBoner_'s picture

Is that a sock puppet I see before me?

Nice one piliage ;o)

magpie's picture

Greece is a dead duck...more interested in what happens with Spanish debt when Catalunya seceedes. 

Debt union creates political union - working in reverse this time. 

CrashisOptimistic's picture

Don't look past Greece.

If Greece's swaps trigger, there may not be a Spain, or anything else.

eigenvalue's picture

Greece's swaps triggered? What swaps? CDS?

falak pema's picture

either way the banks burn. Capitalism takes a big knock on the nose. 

magpie's picture

My theory atm is that there will be an outright default but contagion will be contained like the Dubai one. Everyone important is doing mark to fantasy and open printing anyhow. The ECB defrauding its own balance sheet for the greater European idea, who cares. Even if somebody screams recapitalization there is the German tax drone at their service. Depends on ISDA ruling against the CDS holders once more does it not. The IMF says too bad, better luck next time but live the austerity pour lencourager les autres. Yes this assumes Greece still stays in the EZ

ebworthen's picture

"...a successful debt buyback might resolve the Greek debt sustainability issue on paper..."


More paper promises.

Default already Greece.  Drachmas!

Rustysilver's picture

I am so tired of hearing about f`kn Greece.

falak pema's picture

its to PREVENT you hearing about a much bigger story scripted in Cinemascope called Banksta armageddon; the greek pebble in the shoe of banker world could start those dominoes falling. 

We die by a thousand cuts in Greece n Spain, so that we don't die all at once! That's the name of the game! 

Can u blame them, I can for getting us into this blind alley, but now that we are there, nobody has the slightest idea how to get us out of cul-de -sac. So we sacrifice the new christians of Athens to Banksta legions on rampage. 

Still tired? 

MillionDollarBoner_'s picture

Greece is like a captured spy.

If he talks, the whole network goes down.

If he can take the punishment and still not blab...

augustus caesar's picture

Would any Greek posters mind giving us a boots on the ground report? Aren't you people getting tired of this endless tail chasing? Are any real changes taking place among the people themselves?

samcontrol's picture

Greeks don't post anymore, they can't afford it.

Vigilante's picture

Greece here..

A groundswell is building up fast, against the bailouts...

The radical left and the far right are increasing their share day by day..

Critical mass should be reached by spring/summer.

The big question is which is gonna come first..

Political upheaval and euroexit or Greece being cut loose by the powers that be?

q99x2's picture

So they are no longer funding the country but negotiating on how to prevent a Lehman event. Interesting, computer financial programs might not be able to wait and an avalanche could start faster than it can be stopped.

I'm buying silver.

MillionDollarBoner_'s picture

"I'm buying silver."

Fuck me! - are you behind the curve...?

Peter Pan's picture

Even with no debt, Greece is not sustainable with its current low level of tax compliance, high percentage of useless public servants, gutted manufacturing and an aging demographic that isn't leaving the country like its youth.

Greece will only become sustainable if its citizens stop having high expectations of government and if politicians and bankers stop sticking their snouts into the trough. Both of these things are a big ask.

Germany better save itself and leave the emergency ward before it become the patient.

The reality is that most of what is at stake is paper promises that do not attach to anything other than expectations on the one hand and future tax revenues on the other. These are a total mismatch at the moment.

are we there yet's picture

Bonds are paper symbols, of a politicians promise, based on their selfless wisdom and honesty.

MillionDollarBoner_'s picture

When dealing with ClubMed its always helpful to differentiate between the people and the state.

The Greek people will be fine - except for those Welfare Queens, the public sector workers. Check out the mass rally next time its on - not a single farmer or fisherman amongst them, just a bunch of over-paid, over-entitled, under-employed State "workers".

The Greek state is fucked but then the Greek people never bought into it in the first place. That's why they don't pay taxes - and good luck to them, too!

Vigilante's picture

The 'welfare queens' are making half the money they did 2 yrs ago.

One of the good things of the austerity measures

are we there yet's picture

What is the exchange rate between Greek bonds and Enron stock?

EARLPEARL's picture

meanwhile back at the ranch...everything just fine dow going to 20, can this be?

OneTinSoldier66's picture

Pay no attention to the Financial System. Do not look at the man behind the curtain pulling the levers.


Listened to KWN interview with Michael Pento. He said the deficit spending for the first month of the 2013 fiscal year(October) was up 22% from the previous year. The Fed is out of short-term bonds to buy the longs ones for Operation Twist. So, starting in January, The Fed will be purchasing unsterilized MBS and Treasuries to the tune of $85 Billion per month. QE and ZIRP as far as the eye can see.


In other words, Interest Rates must never, ever, ever... be allowed to rise, until such time that they do.


And when they do? Well, I guess we'll finnally get to see how much the American people were robbed and lied to. Right now, most people 'pretend' they have not been robbed nor lied to. Or perhaps they just don't care. But one day, those that don't care, will be made(by market forces) to care.


Btw, I also found this to be an interesting article...

A Macro View of T Bonds Gold & Money Supply

Everybodys All American's picture

Don't think for a moment that a further downgrade of the US credit rating will not be far behind when this unsterilized monetization becomes reality. Also, bare in mind Bernanke testified before Congress that he was not monetizing debt. Can anyone with half a brain believe that statement any longer beginning in January. Next year is going to be real interesting indeed.

are we there yet's picture

From a historical perspective the ECB has essentially conquered europe for longer than the axis or hitler did, with only an army of accontants, and politicians with a promise of something for nothing if you trust them. I give the ECB at most 3 years before it finally morphs into a new kind of invisible octipus controling the next interation of pseudo democracies in europe.

Jacks Cold Sweat's picture

Being a Greek citizen, here's a summary

  1. Private sector works and pays for the huge,useless and unskilled/counterproductive public sector , which was nurtured and boosted after the fall of military Junta in 1974. The main two parties that have been governing Greece for 38 years, PASOK and NEA DIMOKRATIA have been giving bonuses to public sector workforce every time they were elected, since public sector now is the main force of the voters.Bus drivers in Athens (working for the state owned OASA) were receiving bonuses for arriving early at work, for warming the engines and other unbelievable stuff that you wouldn't believe.
  2. Greece is full of zombie  banks. All banks give fake reports to the Bank Of Greece showing fake numbers (numbers who are forged with accounting tricks). 
  3. Bank of Greece gives those reports to ECB and money keep on flowing. If ECB monitored all the banks maybe there were only 1 or 2 banks alive and kicking in Greece.
  4. The National Institute of Social Security had bought Greek bonds with their money. :)
  5. Same thing happened with Universities.
  6. Doing business in Greece is a painful decision. High taxes/unstable taxing system, bureaucracy,bribing
  7. Bad education. There are political branches inside Universities from the left wing, right wing and communist parties that close the Universities whenever they feel like etc
  8. Low level/quality of politcians. Just take a look at the ad about Greece that Ministry of Tourism made. 

The only viable solution, from the begining, was to fire half of the public sector. Period. 
However, since nobody is willing to take the politcial risk to do it (lose voters), the can kicking continues. 

The biggest shock is not purely economical, but cultural. Greeks have been buying magazines with dolce & cabbana miniature pefumes until recently , when the big opinion makers /pop culture promoters/skullfuckers went out of business, signaling the end of an era metaphorically and literally.

zilverreiger's picture

ECB & IMF now calling for a 50% haircut on greek debt, bye bye dutch and german tax money hahaha

MillionDollarBoner_'s picture

Is there and English language version?

I follow the link and its all written in fucked-up Dutch.

Everybodys All American's picture

As long as everyone including the ECB or EU that hold Greek debt also took the haircut I'd have no particular problem with the proposed solution. But we know that will more than likely not happen. We also know with all the delaying and monkeying around for over the last two years and moving important players (banks) out from under the Greek debt problem that this solution will only make matters worse. The trust will no doubt have been broken. Any new issued debt will be impacted greatly. The entire trust between bond holder and debt issuer at risk in Europe and maybe elsewhere. Who in their right mind will buy European sovereign debt.

CrashisOptimistic's picture

Read that carefully.  It's hilarious.

The remaining lending groups to Greece are 


The EU tools (EFSF)


The ECB and IMF have suggested a 50% haircut. . . by the EU tools.  Not themselves.  hahahaah

luckylongshot's picture

Used to be when you said Greek people thought about anal sex...what a conincidence!!!