Tuesday, 4 December 2012

Bond Buyback To Wipe Out 90% of Greek Banks' Bond Value

Greece's Public Debt Management Agency yesterday announced that ten billion euros will be spent buying back Greek bonds at discount, amounting to the second haircut for Greek banks this year. The money will go towards 40 billion euros' worth of bonds, meaning a discount of 75 percent on average. If achieved, the size of the buyout is more than enough to cover Greek banks' entire bond holdings.

The bonds in Greek bank vaults have already been discounted by a similar rate in March, during a restructuring that shaved 107 billion euros off the value of bank holdings of Greek bonds globally. This means that Greek banks' bond holdings will undergo a cumulative discount of more than 90 percent.

The buyback money comes from the European Financial Stability Fund (EFSF), the temporary facility set up in 2010 to bail out overindebted eurozone governments. After the buyback, the EFSF will spend 23.8 billion euro recapitalising the Greek banking system. The buyback will also pave the way for the eurozone to spend 10.6bn euros financing the Greek budget this year and another 9.3bn euros in the first quarter of 2013.

Greek banks have suffered a quadruple disaster since the beginning of the crisis: their cash reserves have dwindled from about 240bn euros to 165bn as Greeks sent their money abroad or lived off savings; their non-performing loans have soared; the value of their main asset, Greek government bonds, has plummeted; and their share value has collapsed to about a quarter of its pre-crisis levels. They have been staying afloat by borrowing from their sole source of credit, the European Central Bank, but much of this cash has been sucked up by the government during periods when its rescue programme was frozen.

The banks' plight has been shared by the rest of Greek society as liquidity to households and enterprises has dried up. The refinancing, and a consolidation currently underway, is supposed to put an end to this financial desert. In an interim report on monetary policy yesterday, the Bank of Greece said these two factors will "strengthen the trust [towards Greek banks] of domestic depositors and international money markets" and "positively influence the flow of deposits and Greek banks' access to international money and capital markets." 

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