First Greek Bailout Snag - Local Bankers Refuse To "Voluntarily" Participate In Critical Bond Buyback

Those who have been following the recent developments over the Greek distressed debt buyback, which in any normal universe would have been considered an event of default but certainly not in "special cases" such as Greece where the country's official default would start the Lehman-like domino collapse as apparently getting a 70 cent haircut in 8 months is a "voluntary" event, have been quite confused by the internal dynamics. On one hand the sole beneficiary of the transaction are those hedge funds who bought the GGB2 bonds when they tanked to lows just barely in the double digits as a % of par; on the other, there is absolutely no benefit to the Greek people as a result of this sub-par prepayment, as the only fund flow benefits hit the bondholders (and it is up to Greece to figure out how to grow its GDP by over 4% per year over the next 8 years). Then let's not forget that nobody has any clue yet where the funding for said buyback will come from. And finally, as Kathimerini just reported, we learn that one group that has just vocally declared against the buy back are the very people who are supposed to be benefiting from the Greek bailout: i.e., the country's bankers.

From Kathimerini:

Bank managers are planning to express their opposition to the credit sector’s likely participation in the bond buyback program at a meeting with Finance Minister Yannis Stournaras scheduled for Thursday.


The administrations of all commercial banks are stressing that they cannot possibly participate voluntarily in a program that leads to the financial exhaustion of shareholders.

Oops, looks like the local bankers are suddenly far less "voluntary" inclined, after realizing that their equity stakes will be largely impaired in the balance sheet waterfall, which sees bonds previously marked to myth at par, remarked to 35 cents, 20 cents, or whatever the final buyback price is agreed upon, largely a function of whatever cash the Greek government can find hidden underneath the rug.

Senior bank officials told Kathimerini that besides the legal consequences of a possible voluntary participation, such a serious decision, which would signify a change in the lenders’ portfolios, cannot be approved by their governing boards alone. They underlined that such a decision would require discussion and approval at general shareholders meetings, but that would compromise the buyback plan as it is a process that takes time.

In their meeting with Stournaras the bank managers will ask for their exemption from the buyback and propose alternative solutions to the problem.

They will also request changes to the terms of the recapitalization process. The main point is how to reduce the amount of capital requirements, which could take place via the bond swap or through the guarantee of bank bonds by the European Financial Stability Facility (EFSF), which would allow for their valuation at their nominal value. That would reduce capital needs by 11 billion euros at once and render recapitalization much more attractive for private shareholders. The more funds private investors contribute in the recapitalization process, the less money the state will have to pay through the Hellenic Financial Stability Fund (HFSF).

Bank officials argue that the scheme proposed for the buyback process is bereft of financial logic as it constitutes double borrowing and additional burdening for taxpayers. By contrast, they say, the guarantee of bonds would have a better result at no additional cost. However these alternative plans were rejected by the representatives of the country’s creditors a few weeks ago and there is no sign of them changing their attitude on the issue.

Analysts say that banks are right to protest as in spring they were burdened by the 53.5 percent bond haircut and a few months later the state is asking to buy the bonds back at 30 percent of their value.

To summarize:

  • Greek banks have suddenly become the fulcrum stakeholder class, and if their "involuntary" posture is maintained can scuttle the entire bailout as (mis)conceived over the past month.
  • Hedge fund buyers of GGB2s in the secondary market are delighted by the Greek buyback as it means a 50%, 100% or maybe even higher return in months - a number which can, however, collapse if the discovered funds for the buyback are limited to single digit billions, resulting in a scramble to sell to the biggest fool and thus only bid left.
  • Greek bankers are furious as there will actually be a repricing of the fair value of the GGB2s held on bank balance sheets, and coupled with no new capital infusion from the ECB. For the fatally insolvent Greek banking system this is yet another net capital outflow it simply can not afford.
  • In effect, there is a new priming of General Unsecured obligations, as the new money will likely come at the expense of a new tranche of senior/secured debt.
  • As pertains to the Greek economy, the outcome either way is irrelevant, as there is not one penny that actually enters Greek society or its economy.
  • Also worth noting: Germany is set to vote on the Greek bailout even as it suddenly appears that the entire third Greek bailout as previously conceived is at risk of being sabotaged by none other than the very people it is supposed to be helping!

Or, in an even briefer summary: winners - hedge funds; losers - everyone else.


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