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Greece fails to collect enough bids for the debt buyback

10 December 2012 / 14:12:38  GRReporter
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The Greek debt buyback has stalled. The recent data that have been announced in the public domain suggest that the government cannot reach the target for the buyback of bonds of a nominal value of 30 billion euro. So far, the Public Debt Management Agency has received bids to the amount of 26-27 billion euro, which has required an informal extension of the deadline for the submission of bids. Despite the apparent failure to reach the target for the buyback in time, government sources insist that the process is successful.

"Having in mind that the buyback will succeed, investors may be willing to increase their bids," a representative of the government, who wished to remain anonymous, told Reuters.

If Greece's international lenders accept the buyback in its present form with 3-4 billion euro less than originally anticipated, the buyback will decrease the country's debt by around 18 billion euro. Should the countries of Europe and the International Monetary Fund request to buy back a nominal debt of 30 billion euro, the Greek banks would have to bear the burden. Their contribution should reach 13 - 14 billion euro in order for the debt to decrease by 20 billion euro. Mega TV reports that for the time being, Greek banks are taking part with government bonds of a nominal value of 10 billion euro.

The National Bank of Greece (NBG), Eurobank, Alpha Bank, Postbank (TT) and Attica Bank will participate in the buyback from the Greek side. If the participation of foreign investors does not increase within the next 24 hours, smaller local financial institutions will most probably take part in order to support the process and to achieve the goal of reducing the debt as agreed with the international lenders. Sources quoted by Imerisia do not preclude a 48-hour extension of the deadline for the submission of the bids.

Local analysts comment that the participation of foreign investors and hedge funds should exceed 15 billion euro. Otherwise, the Greek banks will be deprived of one hundred percent of the bonds held by them, which will result not only in the loss of the ability to recover the nominal value of specific government bond loans but also in losses of interest earnings amounting to four billion euro.

Once the process is complete, international lenders must approve the execution of the rest of the actions aimed at reducing the 40 billion euro debt. These actions include extending the term of repayment of support loans, reducing the interest rates on the loans from Europe and the International Monetary Fund obtained to date and returning part of the profits from the trade in Greek securities by the European Central Bank.

Although the bond buyback process has its opponents, George Prokopakis made an analysis in, emphasizing that the benefits to Greece are much larger than the loss stated by bankers.  He claims that the government bonds with a nominal value of one billion euro, which were launched on the market after the debt haircut in March 2012 (PSI), require the state to pay an annual interest rate of 20 million euro on them. From 2016 onwards, the interest rate on these bonds will increase from 2% to 4.6%, which will immediately lead to an increase in the interest obligations and they will become 46 million euro. The debt buyback offers an exchange by which one billion euro debt to private investors is replaced by 350 million euro debt to the European Financial Stability Facility (EFSF). The interest rates to the EFSF are significantly lower than the present ones - only 2.5 million euro per year and their payment is due only after 10 years.

Thursday, 13 December, is the day of the next meeting of the Eurogroup, which is expected to release the aid tranche of 34.4 billion euro. The two conditions for Greece to receive the money are the vote on a change in the tax system for the taxation of individuals and a clear picture of the results of the debt buyback. The changes in the tax law will be submitted for a vote on Tuesday this week. The government believes that the bill will be passed despite the resentment against rising taxes. By Wednesday, the results of the bond buyback must also be clear and with these two conditions fulfilled, Greece will be waiting to be granted the promised financial aid, the largest part of which (24 billion euro) will go to support the banks.

On Friday, the 3.4 billion euro bond loan Greece had received by the European Central Bank will mature. Even if the country receives the financial aid in time, it will still have to resort to a new expensive short-term loan. On Tuesday, 11 December, the Public Debt Management Agency will hold an auction for one-month government bonds, hoping to raise 5.4 billion euro, which will pay its obligations to the European Central Bank and will meet current needs in the budget.

Tags: EconomyMarketsBuybackBondsForeign debtCrisisGreece
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