Greece Announces Terms of Bond Buyback to Slash Debt

While the buyback had been expected, the prices offered by the government were above what the market had forecast, with a minimum price of 30 cents on the euro and a maximum level of 40 cents, for a discount of 60 to 70 percent.

Analysts expect that the average price will ultimately be 32 to 34 cents on the euro, which would represent a premium of 4 cents above the level 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,” Mr. Moscovici said Monday at the European Parliament ahead of the meeting of euro zone finance ministers to discuss Greece in Brussels. “It just has to be very quick.”

A successful buyback is critical for Greece. The International Monetary Fund has 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 €10 billion, 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 €62 billion in debt owed to the private sector. The country still owes about €200 billion to European governments and the I.M.F.

Analysts believe that as much as €20 billion worth of bonds held by Greek, Cypriot and other government-controlled European banks will agree to the deal at a price in the low 30s. That would mean that in order to complete the transaction, hedge-fund holdings of €8 billion to €10 billion in bonds would have to be tendered at a price below 35 cents. Any higher price paid on the bonds would mean that Greece would have to ask its European creditors for extra money — an unlikely outcome at this stage.

Perhaps oddly, for a country that is so close to bankruptcy, Greek bonds have become one of the hot investments in Europe. Large hedge funds, like Third Point and Brevan Howard, have accumulated significant stakes starting when the bonds were trading in the low teens this summer. Shorter-term traders have been snapping up bonds at around 29 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 fund investors — especially those who might be more risk-averse and have a shorter perspective — would agree to the deal at a price below 35 cents.

But there are also a number of foreign investors looking to the longer term who may decide to hold onto a major proportion of their holdings in the hope that the bonds will rally even more after a successful buyback.

“I think the bonds could go to as high as 40 cents in a non-exit scenario,” said Gabriel Sterne, an analyst at Exotix in London, referring to the now widely accepted consensus view that Greece will not leave the euro zone anytime soon.

Comments by Chancellor Angela Merkel reported in the German news media over the weekend raising the possibility that European governments might offer Greece debt relief in future years have also encouraged bondholders, a number of whom expect Greek bond yields to trade more in line with those of Portugal in the coming years. But the risk to such an approach is substantial. No longer will there be the prospect of a buyback to push up the prices of Greek government bonds.

Spain, which is also seeking to overcome crippling debt problems, began the process Monday of formally requesting €39.5 billion in emergency aid to recapitalize its banks. It also announced that a tax amnesty had yielded only €1.2 billion, less than half what the government had expected.

The request for emergency aid was being sent to the authorities managing the euro-zone bailout funds, according to Spanish officials, who added that no further approval would be needed from ministers meeting in Brussels.

Article source: http://www.nytimes.com/2012/12/04/business/global/greece-announces-terms-of-13-billion-bond-buyback-to-slash-debt.html?partner=rss&emc=rss