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Greece Looks at Offering Creditors a Buyback to Lower Its Debt

Essentially, Greece would propose that its private sector bondholders sell back their sovereign debt holdings for a small profit, but at a price favorable to Greece. The move takes a page from the playbook Greece used earlier this year in which the government pressured banks and other private holders to take a loss on their sovereign bonds so Greece could ease its debt load. This time, they would not be forced to take a haircut, but some would most likely balk at being forced to accept a new deal.

The aim is to further reduce an ever-increasing sovereign debt burden that is fast approaching 200 percent of gross domestic product, far beyond Europe’s ideal of 60 percent or less.

Many different strategies about how to address Greece’s debt load are being discussed by its creditors, with the buyback option being just one of several. The government this month narrowly secured parliamentary approval for yet another round of spending cuts and tax increases, putting Greece on the verge of receiving 31 billion euros, or $39 billion, in desperately needed bailout loans. The euro zone is also weighing measures — like extending loan maturities and paring interest rates — that would further ease the country’s financial burden.

While the most pressing need is securing the 31 billion euros Greece needs to survive, arriving at a long-term solution for its bloated sovereign debt is also seen as crucial, given that the economy continues to shrink. An estimate released Wednesday showed Greece’s economy contracted by 7 percent in the third quarter — which makes the debt relative to economic output all the more onerous.

To that end, a small circle of lawyers and bankers are suggesting that Greece offer to buy back its deeply discounted debt at a price of 27 to 33 euro cents, compared to the 25-cent level where it currently trades. If investors hold out for a higher price, the government could invoke collective action clauses (C.A.C.’s) in the bond contracts that, in theory, would prevent a bidding war, thus allowing the country to retire as much as 40 billion euros of its 340 billion euros in debt.

For example, the 62 billion euros’ worth of new bonds that Greece issued as part of its landmark debt restructuring deal reached with private bondholders in March are now valued at about 15 billion euros, or $19 billion. If Greece were to borrow the money to buy back this debt, it could retire 30 billion to 40 billion euros’ worth of its obligations, depending on the ultimate price it pays.

While borrowing such an amount would be a challenge, Germany — the biggest euro zone economy and thus the biggest contributor to the Greek bailout — could take the view that this would be a better way to reduce Greek debt than to ask taxpayers to swallow a loss via a write-down of public sector bailout loans.

Unlike the last time around, when the protracted wrangling between the Greek government and private bondholders centered on banks, hedge funds and other investors’ accepting a reduction in the bonds’ value, they will not have to suffer a large loss on their bond holdings. Depending on the price, however, they may have to forgo some further upside if the bonds continue to rally after the buyback.

If successful, the debt buyback could significantly reduce Greece’s debt and afford the country a realistic chance of meeting the target of a debt ratio of 120 percent of G.D.P. by 2020 that the International Monetary Fund has set as a condition for it to lend more money. European leaders have said that this benchmark is too stringent and needs to be relaxed.

Of course, the idea has infuriated the many hedge funds that in past months have scooped up more than 22 billion euros’ worth of Greek bonds at rock-bottom prices. With many sitting on big profits after the recent market rally, they are in no mood to sell out cheaply, especially if Greece resorts to wielding a legal cudgel to complete the deal.

“It’s really the dumbest thing that Greece can do right now,” said Hans Humes of Greylock Capital, who has been one of the more aggressive investors in terms of accumulating discounted Greek bonds.

Collective action clauses are legal riders in bond contracts that can make it easier for a debtor country to restructure its loans by forcing holdouts to accept the country’s proposal for a bond swap if a certain majority of creditors agree to it. They were used to great effect during the 100 billion euro restructuring of Greece’s private sector debt earlier this year.

Article source: http://www.nytimes.com/2012/11/15/business/global/greece-looks-at-offering-creditors-a-buyback-to-lower-its-debt.html?partner=rss&emc=rss

Europe Now Doubts That Greece Can Embrace Reform

Officials from the so-called troika of foreign lenders to Greece — the European Central Bank, European Union and International Monetary Fund — have come to believe that the country has neither the ability nor the will to carry out the broad economic reforms it has promised in exchange for aid, people familiar with the talks say, and they say they are even prepared to withhold the next installment of aid in March.

Adding to the anxieties in financial markets, talks broke down Friday between the Greek government and private lenders over a plan to reduce Greece’s debt by $130 billion, a “voluntary” default that the troika has demanded before extending more aid. Those negotiations, aimed at forcing hedge funds and other private holders of Greek debt to accept large losses in order to make the country’s debt load more manageable, will resume Wednesday amid rising concerns about the consequences of failure.

The markets have taken into account a voluntary default by Greece, most experts say. But financial experts fear the possibility of an “involuntary” default if the negotiators are unable to reach an agreement. That could unleash violent market reactions that could conceivably produce another market cataclysm like the 2008 bankruptcy of Lehman Brothers and throw the world into another recession.

Fanning those fears is a growing conviction among the Greek political establishment and the country’s lenders that the old dynamic — with Greece pretending to make structural changes and its lenders pretending to save it from default — has become untenable, people close to the talks say.

As recently as November, Greece and its lenders were optimistic that the country’s newly installed prime minister, Lucas Papademos, a well-respected financial technocrat, would stabilize Greece’s soaring debt and help nurse the country back to health.

But since then, his interim government — stocked not with technocrats but with politicians gunning for national elections as soon as March — has been paralyzed. Although it passed the 2012 national budget, it has failed to put into effect most of the unpopular changes mandated by the loan agreement that the previous government made back in 2010, when the country first admitted it was broke.

“The prime minister is a fine personality — he’s educated, he’s honest, he’s the best you can get around. But no one is helping him,” said George Kirtsos, the owner of a weekly newspaper, The Athens City Press. “Those that take the decisions at a national level believe that Greece will not make it.”

There is considerable posturing in these sorts of negotiations, and the troika has threatened to withdraw aid in the past, only to approve the next loan installment. It may do so again despite its misgivings, because the alternative of an uncontrolled default is too risky. But it will do so only if negotiations with private bondholders can be completed successfully.

But, amid a stream of gloomy news from Europe, including the downgrade of the debt of France and eight other countries, the sense that default is inevitable is growing. “When you simply go over the bare figures I can’t really imagine another scenario,” said Michael Fuchs, a leading member of Chancellor Angela Merkel’s Christian Democratic Union in the German Parliament.

“Mathematics is mathematics, and one plus one has to equal two and not five,” he said, describing how, even with a significant restructuring of its debt, the Greek government’s deficit would still be too large and its economy not competitive enough to put the country back on a sound footing.

That sense can be self-reinforcing as well, making it even harder for Mr. Papademos to push through the changes Greece needs to survive the current crisis.

Greece’s dire economic condition can hardly be overstated. After two years of tax increases and wage cuts, Greek civil servants have seen their income shrink by 40 percent since 2010, and private-sector workers have suffered as well. More than $75 billion has left the country as people move their savings abroad. Some 68,000 businesses closed in 2010, and another 53,000 — out of 300,000 still active — are said to be close to bankruptcy, according to a report issued in the fall by the Greek Co-Federation of Chambers of Commerce.

Nicholas Kulish contributed reporting from Berlin, and Dimitris Bounias from Athens.

Article source: http://www.nytimes.com/2012/01/16/world/europe/europe-now-doubts-that-greece-can-embrace-reform.html?partner=rss&emc=rss

Greece Looks at Offering Creditors a Buyback to Lower Its Debt

Europe Now Doubts That Greece Can Embrace Reform

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