Greece Launches Vital Bond Buyback Program
Greece launched on Monday an operation to buy back debt at a big discount, a vital part of a repackaged rescue plan to avert bankruptcy before the end of the year.
Eurozone finance ministers are expected to review the details of the operation when they meet later in Brussels, as well as discuss help to Cyprus and banking supervision.
The national PDMA debt agency said it had begun offering to buy back Greek bonds from private investors on a voluntary basis, a procedure closely watched on financial markets where there was uncertainty over whether enough investors would accept the terms.
The buyback is a condition for Greece to receive its latest installment of EU-IMF bailout funds.
The PDMA said in a statement that eligible holders had been invited to submit by Friday Greek sovereign bonds to receive payment of between 32.2 and 40.1 percent of the face value.
Those who participate will receive in exchange six-month bills issued by the EU's EFSF rescue fund with up to to 10 billion euros ($13 billion) available for the operation.
Up to 20 series of Greek sovereign bonds with a face value of 62.3 billion euros held by private creditors are eligible for the buyback.
In March, Greece's private creditors had already agreed to write off about 107 billion euros' worth of Greek sovereign bonds and many institutional investors such as banks and insurance companies have completely written off the value of Greek debt in their balance sheets.
The value of Greek bonds has plunged in value as the debt crisis has risen in intensity and since the massive debt writedown by private bondholders at the beginning of the year.
On the eurozone bond market, the interest rate on Greek-10-year bonds fell sharply on Monday to 14.670 percent, the lowest since the debt restructuring in March, from 16.131 percent at the close on Friday.
At Natixis bank in Paris, bond strategist Jean-Francois Robin said that "the market no longer fears that the country might leave the eurozone ... things are going in the right direction."
By using newly-borrowed money to buy back its sovereign bonds at a heavy discount, Greece reduces the total burden of debt in what amounts to a refinancing scheme.
The International Monetary Fund and the eurozone agreed last week in principle to release 43.7 billion euros in rescue loans in four installments from December to March to enable Greece to avoid bankruptcy.
But increasingly concerned that Greece's debt is again increasing to unsustainable levels despite the writedown by private creditors, they required a number of steps be taken, including the voluntary buyback program.
The IMF has indicated it wants to wait until a successful buyback is conducted before releasing its portion of the rescue loans, while EU officials have expressed confidence the funds will be disbursed.
The results of the buyback should be known by December 13, when eurozone finance ministers are expected to decide on the release of the funds.
The EU has resisted pressure by the IMF for official creditors the write down the value of their loans to Greece, but the interest rates on rescue loans are being cut.
The eurozone and IMF also agreed last week to loosen Greece's debt target to reaching 124 percent of gross domestic product (GDP) in 2020, from an expected 190 percent next year.
A successful buyback would allow the government to cut its debt by 20 billion euros, according to Greek bank Eurobank.
Moody's rating agency said last week that it was uncertain if there would be sufficient participation in a buyback "to contribute to a meaningful debt reduction".
Jean-Francois Robin, a analyst at Natixis investment bank said "the question is whether this offer will have the same success as the March 2012 restructuring."
The participation of Greek banks, which 17 billion euros in sovereign debt, is likely to prove crucial to the program.
Last week Greek banks signaled their reluctance to accept further losses on their government bond holdings after the March writeoff.
Last week Greek Finance Minister Yannis Stournaras said "the success of the operation is a patriotic duty."
Greek banks are also in critical need of the release of the rescue loans, a major part of which is dedicated to recapitalizing them.
Moody's expressed doubt however that even with the buyback and disbursement of the latest rescue loans will resolve Greece's debt problem.
It said given that around 70 percent of the country's debt is held by official creditors such Greece's eurozone partners and the IMF, that "only a reduction in principal on outstanding official debt would lead to a semblance of sustainability in Greece’s debt."
Germany, which holds elections next year, has been most vociferously opposed to eurozone states writing off part of their Greek debt.
But German Chancellor Angela Merkel on Sunday did not rule out taking a so-called "haircut" on Greek debt after 2014, marking an apparent softening in position.