From Business Recorder:
The euro zone may be starting to get to grips with the Greek crisis. The idea of bond buybacks by the European bailout fund is back on the table. The European Financial Stability Facility could lend to Greece to buy its own debt back... The idea isn't entirely new: it was mooted last year before being shouted down by Germany, which saw the plan as a backdoor way of making other countries take on Greek debt...
A buyback could genuinely bring down Greece's debt. It could be done in conjunction with lower interest rates on Greece's bailout loans, and some form of extension of bond maturities. This three-way formula could pave the way for compromise between the ECB and euro governments.
Greek debt is trading, on average, at about 55 cents on the euro. A buyback of all the country's debt at that price would cut the country's debt load to 87 percent of GDP, lower than Portugal or Ireland.
I have been told that it is considered very ungentlemanly for a country to buy back its own debt at a discount to face value, but needs must.
To do it properly would require a lot of connivance and cloak and dagger stuff and saying one thing and doing another (in which Greece are past masters). Ideally what Greece would do is openly go out an borrow another €175 billion from the ECB or IMF (or whomever), pushing its nominal debt-to-GDP to something silly like 250% of annual GDP. While ostensibly pissing this money up the wall, as per usual, they would actually squirrel it away somewhere safe.
Let's assume the market value of the old outstanding debts falls even further to half its nominal value of €350 billion. Greece would then, very carefully and using lots of nominees, buy up all the outstanding debt which comes on the market, taking care not to push up the price again. It can easily keep the market value down by publishing horrendously bad figures for unemployment, deficits, fall in GDP, allowing a couple of its banks to go bankrupt and so on.
Once it has bought back most of its old bonds, it can merrily shred and burn them, hey presto, old debts exitinguished and it now only owes the €175 billion figure mentioned above.
A grim document
11 hours ago
16 comments:
So they just default without having to admit it openly?
AKH, yes, exactly that.
Its not the same a default as the bond holders are willingly selling at less than face value on the bond market anyway. It has simallar mathematics to the Danish mortgage market where home owners can buy back there own mortgages.
Or they could openly offer to buy back at slightly below whatever the market price is on the day. Lots of people would take the bird in the hand I reckon.
Den, top marks to Denmark, yet again. Whether you call this a default or not is a philosophical point, AFAIAC, it very much is.
BE, quite how the maths and psychology works I don't know, but a lot of the banks have been doing limited debt-buy-backs-at-well-below-nominal value and they seem to have got away with it.
Because of the accounting rules, they can even record this as a profit, which it is of course, being the equal and opposite of the bondholders' loss.
The European Financial Stability Facility could lend to Greece to buy its own debt back...
Showing just how artificial the whole notion of the debt economy is. The main game is sovereignty.
JH, that's the clever bit.
Greece doesn't actually need to borrow the money from a third party to buy back their own bonds - if you cut out all the intervening steps, what it does is issue EUR 175 bn of new bonds and use these to buy back EUR 350 bn of old bonds. Thus recapitalised, the interest rate they have to pay will halve, allowing them to do another decade or two of rabid deficit spending before they do it all again.
You can't keep a secret that big secret can you?
Are bond traders really that dumb?
How long does it take to buy up *all* of any commodity (Greek debt, gold, pork bellies, tulips, whatever) that comes on the market, quietly, and without affecting the price?
Surely a buy-up on this scale would face what IIRC is called "impact costs"? Ie if a big buyer enters the market, the impact he has on demand automatically drives the price up?
Some Bond traders are that dumb, Steven. I can well recall the heady days of 1998 when a default by Russia seemed to be on the cards. The problem was that everyone seemed to have the same position and the value of Russian Principal debt was crushed, down to the point at which it suddenly became more economical for them to buy it back rather than pay the next coupon. Nobody appeared to notice this apart from me, and I had worked it out on the back of a fag-packet...
SL, the secrecy thing would be a big problem, but even if the plan is abandoned half way through, it has still achieved something, it can always be restarted later on.
CJN "How long does it take to buy up *all* of any commodity... quietly, and without affecting the price?"
Clearly It's impossible to buy all of it, but so what? As I said above, if they only manage to buy back half outstanding debt they have still achieved something.
RE, ta for anecdotal. There's a lot of psychology and propaganda involved if you want to do these things properly.
If Greece did this it could actually send bond prices down. If the perception was that an unsuccseful buy back then leads to default
there could be a selling stampede down a greasy Greece dept mountain.
I thought that was how it was supposed to work?
Den, yes, like I said, expectations have to be 'managed' carefully.
Ch, yes, that's how it's supposed to work. The market value of debt is the market's estimate of what the debtor can realistically afford to pay.
There are two possible and contradictory effects either bond prices sent up by Greece buying and Greece happy with low interest rates on re-financing, or bond sent pushed down by expectations of default after the buy back period dand cheaper buy back.
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