Greek Debt Buyback Update

It's All 'Voluntary', Honest Injun!

by Pater Tenebrarum

We recently discussed that the mooted Greek debt buyback was getting more expensive as hedge funds flock into the debt to make hay from this latest desperate ploy. This has resulted in the truly bizarre spectacle of eurocrats trying to talk the value of the bonds of a peripheral country in trouble down. Pity there's no ratings agency around willing to deliver a downgrade right now.

Now come reports that the Greek government has magnanimously decided to keep participation in the buyback 'voluntary' for now.

We hadn't been aware hitherto that a plan to steal money from the bond holders outright was actually even considered, but apparently that is actually the case – why would they otherwise stress that it's all 'voluntary'? As soon as the buyback is no longer 'voluntary', there is absolutely no way anymore for bondholders to ever get their money back at par of course. 

Reuters reports:

“Greece has hired Deutsche Bank and Morgan Stanley to conduct a voluntary buy back of its debt, a senior finance ministry official told Reuters on Wednesday.

Eurogroup finance ministers and the International Monetary Fund (IMF) agreed earlier this week to conduct the buy back by mid-December, as part of measures to make Greece's debt sustainable.

Private sector analysts have since raised questions over whether it would attract enough interest from bondholders to deliver the promised savings and how it would be funded. "We hope that early next week, if possible on Monday, the Public Debt Management Agency (PDMA) will publish the invitation for the buy back," the official said on condition of anonymity.

Deutsche Bank will be the lead manager. Deutsche and Morgan Stanley will act together as deal managers, the official added.

One proposal is to lend Greece around 10 billion euros from the euro zone's rescue fund EFSF, which would allow it to buy around 30 billion euros worth of debt, cutting its outstanding obligations by around 20 billion euros.

Officials have said that the repurchase has a target cost of around 35 cents on the euro. The Greek official, however, said that Athens has not determined yet at what price it will offer to buy back the debt from private bondholders.

A repurchase at 35 cents on the euro is seen as a golden investment opportunity for hedge funds which have bought Greek bonds at rock-bottom prices.

But this is less certain for Greek banks and pension funds, which hold combined nearly 30 billion euros of Greek debt, about half of the outstanding Greek bonds in the hands of private investors.

Concerns that the buyback would be imposed on Greek banks at a price that would be unfavorable to them led their shares to plunge since Tuesday. "At this moment, we intend the buy back to be voluntary," the official said.” (emphasis added)

We feel reminded of a scene in the movie 'Being John Malkovich' in which the title character, actor John Malkovich, visits his own head. There is a constant chant by a cacophony of voices inside his head: “Malkovich, Malkovich, Malkovich…”. As we write these words we here a chant by the same voices: “Voluntary, voluntary, voluntary…” they sing.

What will happen though if Greece's pension funds and banks refuse to be subjected to the second 70% 'haircut' within a year? Let us not forget, the bonds talked about here are what remains following the 'PSI' deal earlier this year, which imposed an approximate 70% haircut on existing private sector bondholders – officially also termed 'voluntary' by the way. As soon as the current deal leaves the realm of the 'voluntary' due to a lack of participation, the sheep will likely be shorn again.

To be sure, if there had simply been a market-based solution from the beginning, bondholders would have suffered a very large loss anyway. As it happened, the Greek insolvency has somehow mushroomed into a situation in which on account of two 'bailouts' in a row, both the previous private sector bondholders have lost a lot of money and tax payer funds from the rest of the euro area have been put at risk as well.

One actually wonders what the hell has happened with all that money. Apparently it was used to keep Greece going, in the process allowing it to increase its debt load ever further by continuing its deficit spending. Anyway, we fully expect that in the event that bondholders should prove reluctant to take up the 35 cents on the euro offer, we will witness yet another Orwellian reinterpretation of the term 'voluntary'. War is peace. Freedom is slavery. Ignorance is strength.  Malkovich!