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Greek Debt Buyback: Another Idiotic European Idea Or A Step Toward An Actual Solution?

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From Open Europe

Buying Back Greece: Another Ad Hoc Deal Or A Step Towards A Solution?

Early on Tuesday morning the eurozone and the IMF reached an agreement which has been widely billed as their most comprehensive package to aid Greece. Now that the dust has settled somewhat, Open Europe assesses the key components of the deal.

Conclusion
For all the talk and all the figures flying around there is still only one that really matters – 124% debt to GDP ratio in 2020, clearly this is not sustainable. Further measures will be needed and the ad hoc nature of this deal, particularly the way it skirts the big decisions, suggests that fears over a ‘Grexit’ will return as soon as Greece begins missing its targets once again.

1. Debt buyback

The buyback is short on details, with little clue as to where the money will come from or which bonds will be purchased. The idea behind a buyback is that Greek bonds are currently trading at around 35 cents on the euro, which the Greek government could purchase and then retire, thereby reducing their debt by the difference in the current and nominal price.

Figure 1: Who owns Greek debt?


Source: Greek Ministry of Finance, Greek Public Debt Bulletins, European Commission, Bank of Greece, Open Europe calculations.[1]

As figure 1 shows, taxpayer-backed institutions – or the official sector (EFSF, Eurozone, IMF, ECB, NCBs, Bank of Greece and other loans) – now hold 70.5% (€212bn) of Greek debt. Greek monetary financial institutions (banks, pension funds, investment funds) hold around 10% (€30bn) of Greek debt while similar firms abroad hold around the same amount. Greece currently has a stock of around €18.4bn in T-bills (short term debt).  

It seems that the EU/IMF/ECB Troika expects Greece to be given around €10bn to use for buy backs.[2]

Who would actually sell their bonds in a buyback? The official sector debt is ruled out of any buyback (most is in the form of loans while the ECB has rejected including its bonds). To us it seems illogical for any Greek institution to sell their holding of Greek debt at such a significant write-down, especially after the previous restructuring resulted in such a huge recapitalisation (which offset much of the benefit). The Troika seems to expect Greek banks to provide half of the bonds for sale under a buyback – this is either naïve or counterproductive given the likely recapitalisation needs.[3] Therefore, in reality we expect that only the €30bn of foreign held debt would be available for purchase.

This still fits with the €10bn in funding and the price of 35 cents on the euro and could deliver up to €20bn in debt reduction (around 11% of GDP), if all these bondholders took part.

However, it is unclear how many of these bondholders would wish to sell. Some will be holding the bonds to maturity and will not want to accept any further write downs, while others may be happy to wait for a default and take the case to court due to the new Greek bonds being governed under English law. In any case the debt reduction may be much lower.

Where will the €10bn for the buyback come from? This is far from clear but it is hard to imagine it being found anywhere other than the bailout funds, meaning a new transfer of around €9bn will be needed. This again poses significant political problems as leaders in Germany, the Netherlands and Finland (to name but a few) try to convince their parliaments (and public) that this is not more money into a black hole. It has been suggested that some of the other mechanisms mentioned below could be used to fund the buyback, but this looks impossible since they are being tapped to fill the existing funding gap.

These substantial obstacles to a successful debt buyback are crucial since the IMF has already stated its on-going participation in the Greek bailout hinges on this policy. The likes of Finland and the Netherlands have also previously stated that IMF involvement is requirement if they are expected to continue to aid Greece. With a plan on the buyback expected to be in place by 13 December, to allow for the release of the next tranche of bailout funds, this deal could hit a wall even sooner than many expected.

2. Interest rate reduction

The original bilateral loans to Greece will see their rated reduced by 1%, making it 0.5% over the 3 month Euribor rate. This means the interest on the loans could now be around 1% given current rates. Clearly this is much lower than the majority of eurozone countries can borrow at (especially given the very long maturities of the loans). Countries which are under a “full” bailout are exempted, although Spain, which is in the progress of seeking a bailout for its banking sector will not be. This could further political divisions within the eurozone.

This (along with other slight interest adjustments agreed) could deliver around €3.5bn up to 2016, so although it helps with the bailout extension it does not provide any real debt relief.

Meanwhile, reports already suggest that the Portuguese government has told its parliament that it will be seeking a similar deal with regards to its bailout.[4]

3. Deferral of interest and extension of maturities

This could aid in the short term, i.e. helping to fund the two year extension. However, on net it delivers no reduction and is once again a very short term ad hoc measure aimed at avoiding taking any significant decision on the Greek crisis – especially since a deferral on some interest payments was already in place. Similar things can be said of the maturity extension, especially given that many of the loans already have long maturities at 15 years. Once again this rescheduling of debt would amount to a technical default in most scenarios and does represent creditors forgoing real payments for a substantial amount of time.[5]

4. Dispersal of profits from the SMP

A key point here is that the ECB is not providing the money directly to Greece – thereby avoiding the legal problems of ‘monetary financing’, i.e. directly paying for states. The money will be dispersed to member states as usual and they will pass on an amount equivalent to this to Greece.

The issue with this however is that the profit from ECB actions, including profits accrued from its bond-buying programmes, is usually done on an annual basis and is paid out after it has passed through the ECB profit and loss account (meaning it can be used to offset any ECB losses, although this is unlikely at this time). It is not clear yet whether this will constrain when and how the money can be transferred. However, if the schedule is not the same a plausible case can be made that this is an additional injection of funds rather than a transferral of funds (although this is admittedly semantic over a long period).

5. The prospect of further measures in the future

The Eurogroup statement left the prospect of further measures to reduce the Greek debt burden hanging, teasing markets into believing that an official sector write down is just around the corner.

However, this does not quite seem to be the case. Firstly, such a prospect will only be realised if Greece manages to stick to its (still) strict reform and adjustment programme, something which, despite the extension, remains unlikely. This is driven home by the extensive strengthening of the ‘escrow account’ which increases the level of oversight and makes debt servicing the clear primary objective of the Greek government.

Secondly, while many have interpreted this deal as a step towards a larger more complete decision to keep Greece and others in the eurozone (some form of permanent fiscal transfer) this does not seem to immediately be the case. This deal does everything to avoid taking such a decision, and continues to sidestep the issue even if that means prolonging the pain and putting more taxpayer cash on the line. The hope is that such a deal will be politically more palatable after the German elections next autumn. This may well be true but given that many of the constraints on solving this crisis are legal as well as political, such a decision may not be much easier even after the elections.

Lastly, as the WSJ and FT point out today, extra measures will be necessary to reach the target of 124% debt to GDP in 2020.[6]

What does this deal mean for the Greek economy and the Greek people?

This is a question that has not been asked enough in the past two days, particularly the second part. The increase in oversight through the escrow account and the continuation of the current bailout programme mean more of the same for the Greek economy. Significant structural reforms are still to take place and internal devaluation is on-going. The two year delay in fiscal consolidation looks significant on the surface but much of this is offset by the amount Greece has missed its targets by this year given the two elections. The actual pace of fiscal consolidation is still rapid and the adjustment over the next few years, in an economy which is still contracting, will be unprecedented. The pay-out of the tranches (when and if the buyback hurdle is overcome) will be positive for Greece but only serves to help the economy limp along.

Given the impact on the Greek economy, the impact on the people can be inferred. There is unlikely to be any significant turnaround in the economy in the near future and the impact of public sector cuts will continue to be substantial, albeit maybe not as sharp as it would have been before the two year extension. However, the assumptions on unemployment in the Greek budget and latest Troika report look hopelessly optimistic – we expect it to continue to rise and public unrest along with it. In both cases more of the same seems to be on the cards despite this deal.

For more information please contact the office on 0044 (0)207 197 2333 or the author Raoul Ruparel on 0044 (0)757 696 5823. 


[1] See here for a more detailed breakdown of debt shares and exact amounts for each share. The debt total of €301bn seems low given projections for the end of the year, however, when the next tranches of €34.4bn and €9.3bn are factored in the debt total is clearly in line with expectations. This does not include guarantees given by the Greek government, which amount to around €20bn. NCBs refers to National Central Banks.
[2]
This amount is taken from a leaked document the key table of which was published by the FT. Cited by the FT Brussels blog, ‘Greece, round 3: let the debt relief talks begin’, 28 November 2012. For the specific table see: http://blogs.r.ftdata.co.uk/brusselsblog/files/2012/11/greece.pdf
[3]
This is taken from a leaked document the key table of which was published by the FT. Cited by the FT Brussels blog, ‘New Greek bailout: the leaked chart’, 28 November 2012: http://blogs.r.ftdata.co.uk/brusselsblog/files/2012/11/Greece-2.pdf
[4]
Cited by Journal de Negocios, ‘Portugal terá juros mais baixos e prazos mais longos nos empréstimos europeus’, 27 November 2012.
[5]
This refers to the ‘Net present value’ loss which countries will face. Essentially this arises as future revenue flows are discounted, therefore the longer the payment of these loans is put off the less the money is seen to be worth in today’s terms. This drives home that creditors will be taking a loss somewhere along the line on these mechanisms.
[6]
Cited by WSJ Real Time Brussels, ‘Greek debt deal explained’, 27 November 2012.

 


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Wed, 11/28/2012 - 10:27 | Link to Comment jazze
jazze's picture

who creates this shit with every pie-slice in blue?! how can u read that

Wed, 11/28/2012 - 10:30 | Link to Comment jannewmx
jannewmx's picture

'They' don't want you to know.

Wed, 11/28/2012 - 10:38 | Link to Comment MillionDollarBonus_
MillionDollarBonus_'s picture

Here's an idea: Why doesn't the ECB insure all holders of European peripheral debt? The yields on their bonds would plummet to US treasury levels in no time, and the peripheries could start raising cash to rebuild their economies immediately. Is that good enough for doomer ZHers? What's wrong with that?

Wed, 11/28/2012 - 10:47 | Link to Comment CPL
CPL's picture

MDB you understand that the money lent is only to pay interest on already large loans.

 

Only thing that fixes this historically is a debt jubille for everyone.  I would sacrifice the value of my silver, gold, businesses and land to have this happen.  Still doesn't change the running out of oil thing, but it takes one item off a list of things people worry about and waste energy on.

 

Problems are like gas, they fill the space you let them occupy.

Wed, 11/28/2012 - 11:19 | Link to Comment MillionDollarBogus_
MillionDollarBogus_'s picture

Yep, got that.

Not understanding why the EU doesn't follow Japan's zero interest rate method of debt financing..??

Bernanke & Geithner understand it. 

As long as inflation doesn't interfere, this new money creation can go on indefinatley...

Don't see a problem with that...

Wed, 11/28/2012 - 12:29 | Link to Comment Lebensphilosoph
Lebensphilosoph's picture

Money creation? Ceteris paribus? "Assume a can opener ...". You are a laugh a minute.

Wed, 11/28/2012 - 11:31 | Link to Comment Haus-Targaryen
Haus-Targaryen's picture

Easy -- you'd be fucking the northern countries.  

 

So lets say the ECB insures all Euro debt.  Where do they get the money?  

 

Either they get it from their contributory nations (e.g., mutual indebetedness = Dear Spain we need money to bail out the greek bond holders.  Oh shit, now Spain needs a bailout, dear Greece and Italy we need money to bailout spain.  Oh shit, Greece needs another bailout as does Italy, Dear Greece, Spain, Portugal, France, Italy, France ...) or they print it.  Problem with printing it is you are devaluing the money (earning less than the inflation risk premium of EFSF inflation indexed bonds (you loose purchasing power by saving money)) that nations have saved to bailout banks.  So essentially you screw Grandma and Grandpa Möller who have been good Germans and saved their entire life to bailout the banks and southern Euro countries?  

 

Seems like no one can win except those holding Soutern European debt and no matter what happens the northern saver countries get the shaft.  

 

--- or ---

 

They could just admit this whole thing is a horrible shame of a currency union, break the thing up, and if ClubMED want to throw around money like a suburban mom throws around Halloween candy -- fine, and if the nortern nations just wanna save their cash -- fine too.  No more austerity, no more bailouts, no more fiscal schnanagans out of a faux-psedu-european super state --- everything goes back to normal. 

 

Give up on your stupid EU dream. IT is just that -- stupid.  The quicker this monstrocity can die --- the better.  

Wed, 11/28/2012 - 10:37 | Link to Comment insanelysane
insanelysane's picture

Looking to be a Blue Christmas.

Wed, 11/28/2012 - 10:36 | Link to Comment Haus-Targaryen
Haus-Targaryen's picture

"Look how magnificant the EU is.  We can make a pie chart exclusivly with our "national" color."  

 

 

Wed, 11/28/2012 - 10:36 | Link to Comment buzzsaw99
buzzsaw99's picture

cnbc = unwatchable

euro-blather = unreadable

Wed, 11/28/2012 - 11:30 | Link to Comment Mysteerious Roo...
Mysteerious Rooshian Vooman's picture

 

 

"The difference between journalism and literature is that journalism is unreadable, and literature is not read."

--Oscar Wilde

 

Wed, 11/28/2012 - 10:36 | Link to Comment youngman
youngman's picture

Blue equals socialist....as in socialist state...like the USA...who cares what color at this point...they can´t pay light blue...or dark blue

Wed, 11/28/2012 - 10:36 | Link to Comment insanelysane
insanelysane's picture

Just saw a scroll on Bloomberg TV that says Greece has a Plan B.

Sure they do, it's called the drachma.

Wed, 11/28/2012 - 10:36 | Link to Comment LongSoupLine
LongSoupLine's picture

"Buyback" with what money?

I just answered the question of course.

Wed, 11/28/2012 - 10:37 | Link to Comment kridkrid
kridkrid's picture

It's so cute when they talk about 2020.

Wed, 11/28/2012 - 11:37 | Link to Comment wandstrasse
wandstrasse's picture

they are projecting / planning for less than a decade... this is nothing.. soon they will step to centuries, when GDP growth or whatever meaningless indicator will be fine.. then milleniums and finally, things are projected to become sustainable in eternity1, eternity 2 etc.

Wed, 11/28/2012 - 10:43 | Link to Comment Dre4dwolf
Dre4dwolf's picture

If the buy-back happens at "market value" then this would work because

1) The market value of greek debt is pretty much Zero

2) It owuld liquidate the debt

 

Its actually a sound solution.

Its the same thing as a default, but it has the added benefit of off-loading the bad paper from the stable countries banks.

 

They should do the same thing with mortgages and student loans, offer the people the chance to buy their own debt back at fair value (what it would be, Zero/60~ 80% haircut).

It would save the world actually and give the world another 10 ~ 20 years of sustainable "growth".

 

 

All this paper is worthless anyway, who are we kidding ? I mean do we have to keep pretending forever lol?

Wed, 11/28/2012 - 12:16 | Link to Comment Urban Redneck
Urban Redneck's picture

If could work except for the perverted socialist desire of impotent Europeans to gather around a table and engage in a mental masturbation circle jerk climaxing in a press release...

In order to work, they would need to drop trou and do the deed, then brag their buddies about it...

As it is- it would amount a nothing more than a front-running opportunity for certain preferred market participants which would do NOTHING to help the Greek situation.

Wed, 11/28/2012 - 10:44 | Link to Comment nodhannum
nodhannum's picture

More smoke and mirrors to get the Germans past elections. The whole thing is one giant rube golberg and as such, is made to a) fail and b) be undeciperable.

Wed, 11/28/2012 - 10:45 | Link to Comment Dareconomics
Dareconomics's picture

The Greek bond buy back is a bad idea for one simple reason. Greece has issued this debt on excellent terms paying very low yields for maturities of 11 to 30 years. In 11 to 30 years, they will have to issue more debt, but they will probably have to pay higher yields. This scheme cosmetically enhanced Greece's present debt at the expense of the future.

http://dareconomics.wordpress.com/2012/11/21/greek-bond-exchange-is-a-ba...

Wed, 11/28/2012 - 13:12 | Link to Comment Mountainview
Mountainview's picture

Portugal and Ireland are already preparing to get their deals lightend up...

Wed, 11/28/2012 - 10:46 | Link to Comment blabam
blabam's picture

Ahh the communist 5 year plan... sorry, Euro 10 year plan. Fucknuts. 

Wed, 11/28/2012 - 10:49 | Link to Comment yogibear
yogibear's picture

LOL, it's same old BS. Just papered over.  In politics it hurts too much to do the right thing so you do the politically correct thing. Never admitting to mistakes. 

Wed, 11/28/2012 - 10:52 | Link to Comment SamAdams
SamAdams's picture

All smoke and mirrors, but where there is smoke, there is fire.  In time, fire will subside to ashes of Greek democracy among fragments of banker mirrors.  On the horizon, a new Golden Dawn.  Insufficient domestic skills and resources to repeat history, but well on its way to supporting those that might.

Wed, 11/28/2012 - 10:55 | Link to Comment SamAdams
SamAdams's picture

*was duplicate*

Wed, 11/28/2012 - 10:56 | Link to Comment savagegoose
savagegoose's picture

is this like me paying of my credit card min balance with a cash advance ea month?

Wed, 11/28/2012 - 11:29 | Link to Comment centerline
centerline's picture

check kiting... EU style.

Wed, 11/28/2012 - 11:00 | Link to Comment Perdogg
Perdogg's picture

Isn't Plan B some sort of Birth control??

Wed, 11/28/2012 - 11:15 | Link to Comment FLHRS
FLHRS's picture

Who cares what color the graphs are in.  I used to read this "jerk me off" BS, now I just read the comments.

Wed, 11/28/2012 - 11:25 | Link to Comment centerline
centerline's picture

Funny stuff today.  As if the laws of mathematics have been sucessfully rewritten.  Ha ha.  The "duh" answer is that the inevitable is unavoidable.

Wed, 11/28/2012 - 11:25 | Link to Comment BurningFuld
BurningFuld's picture

This shit all works until the people defending the politicians figure out that they are not getting paid or not getting paid enough to risk their lives defending government institutions. Then the people simply walk in to the parliment, government house or whatever you call it and take over. Hopefully for everyone a non-violent atmosphere will be maintained, but this is how these things finally end. Oh, and no body is getting paid back.

Wed, 11/28/2012 - 13:56 | Link to Comment Winston Churchill
Winston Churchill's picture

Of course nobody's ever  going to be paid back.Same for UST's.

Just a game of chicken.Whose going to blink first and rwealise the

reality of the losses.Game theory says that the first ones win.

Or are they starting to believe their own bullshit.That would be much

more dangerous.

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