Greek Bond Buyback in Trouble

Greece's attempts to buy back bonds may be in trouble. A meeting between finance ministry officials and bankers yesterday ended without a deal, Greek media report.

The bond buyback exercise allows Greece to take advantage of its bonds' low retail value by repurchasing them at reduced rates. It is an essential part of Greece's continued funding by the 'troika' of the European Commission, European Central Bank and International Monetary Fund. On Wednesday Greek Finance Minister Yannis Stournaras called it a "significant part of the debt reduction goal" of 20 points of GDP by 2020, adding that "the buyback has to work." 

Gerry Rice, External Relations Director at the International Monetary Fund yesterday explainedwhy: "we will be looking for implementation of the buyback operation, and contingent on that implementation and the success of the buyback program we will be in a position to put forward the recommendation to our board." 

Should the IMF freeze its portion of the Greek programme, the whole Greek rescue package would come to a halt. The IMF cannot, legally, continue to fund rescue packages not deemed sustainable. 

The debt reduction goal of 20 percent of GDP was deemed necessary by Greece’s creditors on Monday, if the debt is to be brought to 124 percent of GDP by 2020 and “significantly below 110 percent of GDP” two years later. Other measures contributing to that goal include a 15 year extension of bond maturities, a ten year moratorium on interest payments and a return of profits the European Central Bank would make on Greek bonds it bought at a discount.

Bonds for shares?

At Wednesday's press conference, Greek officials failed to clarify how much they intended to spend on the programme, what the minimum buyback contribution to the debt reduction should be, and where the money would come from. They did rule out any funding from the bailout loan or from sales of short-term bonds to Greek banks, which have been the government’s two cash lifelines for the past three years.

Since the state is cash-strapped, one likely buyback method would be to ask Greek banks to sell bonds back to the government at a significant discount in return for some of their shares, rather than cash. Greek banks have lost their independence in terms of equity, because they have received billions in recapitalisation money from the Greek government and the European Financial Stability Facility over the past three years.

But a bonds-for-shares proposal might run into problems. Banks have already used most or all of their bonds as collateral to borrow cash from the European Central Bank and the Bank of Greece. This cash has been keeping the banks, and the Greek government, afloat. Selling these bonds at bargain basement prices, and without a cash prize, might leave them badly exposed.

Recommended reading: Kerin Hope’s article in theFinancial Times.