Monday 3 December 2012

Greek buy back ground hog day

Greece is running a distressed debt buy back Dutch auction for its paper. Its a bit like a bankrupt paying out 30 to 40 pence in the pound. The deal is for a whole series of Greek bonds with a price cents in the euro price of 30.2 to 32.2 for the longest dated maturities and 38.1 to 40.1 on the shorter dates. Bond holders will tender part or all of their bond holdings at a price they set in these ranges. These will then be ranked for each bond and the Greeks will take the bids submitted at the lowest price. They are hoping to buy back their bonds for roughly 35% of what they received for them with a loss to the bond holders of around 65%. Greece will put up to 10bn € up for this auction and this will save them roughly €30 bn including coupon payment savings or the same loss if your a bond holder.

Its the classic Keynesian trick that if you owe a smal amount you are in the creditor's power but if you owe a large amount the creditore is in your power. Greece is in the latter situation and they are the monopoly buyer of their bonds as no one else will touch them. Most of these bonds are held by other Eurozone banks and a few pension funds. No private investor in their right mind would have bought this paper.

The Greek debt mountain then gets reduced by up to €40 bn enabling Greece to get more loans from the IMF and thus avoid bankruptcy for now at least. In politician speak its kicking the can down the road but it comes at a price. Who will buy Greek debt in the next 10 years? Well only those pressurised by their political masters committed to the grand Euro project to preserve their reputation. Will that be enough? Only if the electors back these politicians and that's what concerns Merkel and the rest.

It is one of life's great truths that all politicians careabout is getting re-elected back into power. Whatever happens the Eurozone finance ministers will proclaim this Greek Dutch auction a great success. Their electorates may think differently if they engage their brains.

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