Greece makes bold offer to buy back debt
A successful buyback could pave the way for more money from IMF.
In a bold bid to reduce its debt burden, Greece offered Monday to spend as much as $13 billion to buy back $39.1 billion of its bonds from investors and banks.
While the buyback had been expected, the prices offered by the government were above what the market had forecast, with a minimum price of 39 cents and a maximum of 52 cents, for a discount of 60 percent to 70 percent.
Analysts said they expected that the average price would ultimately be 42 to 44 cents, a premium of about 5 cents above where the bonds traded at the end of last week. Pierre Moscovici, the French finance minister, played down concerns that the Greek debt buyback might not go as planned.
“I have no particular anxiety about this,” Moscovici said Monday at the European Parliament ahead of the meeting in Brussels of eurozone finance ministers to discuss Greece. “It just has to be very quick.”
A successful buyback is critical for Greece. The International Monetary Fund said that it will lend more money to Greece only if it is reasonably able to show that it is on target to achieve a ratio of debt to annual gross domestic product of less than 110 percent by 2022.
Greece will have at its disposal or $13 billion in borrowed money from Europe. Investors who agree to trade in their Greek bonds will receive six-month treasury bills issued by Europe’s rescue vehicle, the European Financial Stability Facility. The offer will close Friday.
If successful, the exchange would retire about half of Greece’s $81 billion in debt owed to the private sector. The country still owes about $261.3 billion to European governments and the IMF.
Even though Greece is so close to bankruptcy, its bonds have become one of the hot investments in Europe. Large hedge funds, like Third Point and Brevan Howard, have accumulated significant stakes, starting this summer when the bonds were trading in the low teens. Shorter-term traders have been snapping up bonds at around 38 cents in order to make a quick profit by participating in the buyback.
In a research note published Monday, analysts at Nomura in London said it was “reasonable and likely” that enough hedge funds — especially those that might be more riskaverse and or a shorter perspective — would agree to the deal at a price below 46 cents.
But there are also foreign investors looking to the longer term who may decide to hold onto most of their holdings in the hope that the bonds rally even more after a successful buyback.
“I think the bonds could go to as high as 40 cents (euro) in a nonexit scenario,” said Gabriel Sterne, an analyst at Exotix in London, referring to the consensus view that Greece will not leave the eurozone anytime soon.
Bondholders were encouraged by comments from Chancellor Angela Merkel, reported in the German media over the weekend, that raised the possibility that European governments might offer Greece debt relief in the future.
A number of bondholders expect Greek bond yields to trade more in line with those of Portugal in the coming years, but without the prospect of a future buyback to push up the prices of Greek government bonds, the risk to such an approach is substantial.