On the sad algebra of the Greek Debt Buyback

In a previous post, I dissected the recent Eurogroup plan to save Greece (again!). Today I single out the debt buyback operation which is a crucial aspect of that plan.

The net debt reduction that any debt buyback operation achieves is simple to compute: By spending sum S on purchasing its own bonds, at a ‘distressed’ y% of face value, the debtor (in this case the Greek government) can expect a net debt reduction equal to NDD = S times {(100-y)/y}.

The last Eurogroup decision proclaimed a target of reducing Greece’s debt by 40 billion in aggregate. Of that sum, 2 billion would be the result of a reduction in the interest rate payable on Bailout Mk2 loans and another 7 billion will come from the ECB returning to Greece the profits it is making from past purchases of Greek government bonds (in the context of the ill-fated SMP). Which means that a further 31 billion of debt reduction is placed on the shoulders of the debt buyback.

The Eurogroup also decided to set the price at which bonds would be repurchased at y=28% of face value – the price at closing on the preceding Friday. With 10 billion at its disposal, the Greek government would, at best, manage to reduce its debt by 25.7 billion, assuming that Greek banks sell all 15 billion of their holdings and, in addition, hedge funds add another 25 billion (of the 45 they hold) to the pot. We see that, even under these ideal conditions, the debt reduction program agreed at the Eurogroup would be short of 5.3 billion. Alas, the conditions are far from ideal and the benefits will be much, much thinner.

Indeed, since the Eurogroup decision, the goalposts have been moved and the rules have changed. First, the offered price was substantially increased. Instead of a flat 28% of face value, Greece’s debt management authorities (ostensibly with the troika’s permission) have called for a Dutch auction within the wide range of 30.2% to 40.1%. Splitting the difference, and assuming an average price of about 35%, the largest possible net debt reduction is approximately 18.6 billion –  a far cry from the planned 31 billion and still contingent on the Greek banks offering all of their bonds (against their wishes to hold as many of them as possible) and the hedge funds chipping in at least 14 to 15 billion.

While awaiting official briefings on the agreed prices and quantities tendered (with the sound of Greece bankers’ arms being twisted by the Finance Ministry in our ears), one thing is clear: The much heralded Greek debt buyback is a tale of two worlds. It constitutes a reward to hedge funds and a ruthless domestic PSI No. 2 (aka a massive involuntary haircut) for Greece’s embattled banks. Moreover, its effect will be a net debt reduction 40% less than the Eurogroup’s stated target.

Meanwhile, the Greek government is struggling to convince Greek public opinion that its domestic default vis-à-vis the Greek banks does not constitute a… default. That, in the final analysis, the banks are better off. To that effect, the domestic kleptocracy’s loyal press core have been arguing that the banks had already marked government bonds to market (at around 25% of face value) and, therefore, that the banks are making a… profit from the buyback. This would be laughable if it were not so pregnant with malicious propaganda the purpose of which is, clearly, to disguise this latest assault on rationality and on the public interest (both of Greek and European taxpayers).

Consider the history of these bonds: they resulted from last February’s PSI, in the context of which Greek banks (along with all other private bondholders) were forced to accept a swap that diminished the present value of their government debt holdings by 75%. The bonds they received after that default incident, branded PSI for marketing purposes, are now the ones that are being bought back at 35% of face value. Recalling, that last February the banks were promised that, due to the success of the PSI, and in return for accepting the PSI, the new bonds that they would receive would be ‘gold plated’, the banks never marked them to market officially (for EBA auditing purposes, that is) – not even after these very bonds began to tumble in value. Moreover, and this is crucial, Greece’s banks have been posting these same bonds with the Bank of Greece (as part of the Greek ELA) as collateral (with only a 30% haircut), thus securing liquidity on a day to day basis. And now, at a time that rumours of a debt buyback have pushed these bonds prices to above 43%, they are being asked to accept 35% or else…

Or else what? Well, it is a common secret that Greece’s banks are bankrupt and exceptionally eager to get their hands on the 24 odd billion that the Greek government is about to borrow from the EFSF to recapitalise them with. So, when the government is ‘offering’ to buy back their bonds, as a precondition for the recapitalisation, this is an offer that the banks ‘cannot refuse’. Of course the tragedy is that this recapitalisation is, especially now, utterly devoid of logic. To see why consider the cobweb of insanity being weaved presently:

The bankrupt Greek state is haircutting almost 10 billion of the money it owes to Greek banks so as to be allowed by the troika to borrow 24 billion, on behalf of these same Greek banks, in order to recapitalise them and in the hope that this recapitalisation will help stimulate private sector interest in the bonds and shares of these banks so that the banks can begin lending to the Greek private sector again, thus kickstarting the Greek economy with a view to generating the taxes from which the nation’s debt to the troika can be repaid. Meanwhile, because Greece’s debt will, quite obviously, not be reduced to anything like the proclaimed (by the Eurogroup) levels, and given that the banks need much, much more than 15 billions to be properly recapitalised, no private investors will invest in Greek banks (especially as they note that they are tied to an insolvent state), the Greek banks will hoard the money that the state will have borrowed from the EFSF on their behalf (fearing that any decent EBA-ECB audit will find their capitalization ratio extremely low, and thus declare them bankrupt) and, at the end of the day, tens of billions of fresh loan tranches will have (like all those that preceded them) authored another nasty act in the cruel theatre of horrors that is the Greek bailout.

And all this will be described by our leaders and mainstream press as a successful debt buyback program that heralds a new beginning for Greece. Just wait for it!

40 thoughts on “On the sad algebra of the Greek Debt Buyback

  1. Pingback: Links 12/12/12 « naked capitalism

  2. 1. Το ποσό που αναφέρθηκε και ειπώθηκε πράγματι ήταν 40 δις €, αρχικά από το IMF. Ωστόσο συζητήθηκε στην Ευρώπη οτι η επαναγορά θα ήταν ίση με το 10% του χρέους δηλ περίπου 35 δις €. Με την επαναγορά το χρέος μειώθηκε περίπου 22 δις. Τα κέρδη που επιστρέφει η ΕΚΤ είναι 8 δις και η μείωση των επιτοκίων συνεισφέρει άλλα 2δις. Σύνολο 22+8+2=32δις ως το 2020.
    Το μέγεθος του πρωτογενούς πλεονάσματος -αν υπάρχει- θα καθορίσει το κούρεμα.
    Λάθος σημείο αντιδικίας.

    2. To IAS 39 που αναφέρεται είναι σωστό όπως και η αναφορά για την τιμή κτήσης. Ο υπολογισμός για τις ανάγκες της Ισπανίας σε κεφάλαια όπως εκτιμάται δεν επιβεβαιώνει οτι στην περίπτωση της Ελλάδας υπάρχει έλλειψη κεφαλαίων, ούτε το αντίστροφο. Καθαρά πρακτικοί λόγοι στην Ελλάδα καθορίζουν ή θα καθορίσουν την έλλειψη κεφαλαίων που σχετίζονται με την πραγματική οικονομία και το οικονομικό κλίμα. Είναι η εμπιστοσύνη. Θα δοθούν 24 δις, τα CoCos ουδείς γνωρίζει τι αντίκτυπο θα έχουν, οι φορολογικές διευκολύνσεις και η πιστωτική διεύρυνση, εξελίσσονται.

    Στην ουσία.

    “Τα 15δις εξασφάλιζαν ρευστότητα 10,5 δις τώρα πλέον γίνονται 3,5δις ρευστότητα γιατί τα ομόλογα έγιναν 5 δις. “

    Μέγα λάθος.

    α) Πέρα από τις MRO, LTRO operations υπάρχουν και οι ταχείες δημοπρασίες (QUICK TENDER) για τις οποίες υπάρχει άγνοια δυστυχώς, έγιναν ξανά τον Ιούνιο του 2010. Αυτό το εργαλείο χρησιμεύει σ ένα πράγμα, παροχή απίστευτα μεγαλύτερης ρευστότητας από αυτήν που χρειάζονται οι τράπεζες!

    Minimum rate (bids) 0,00% Maximum rate (bids) 0,75% και ο νοών νοείτω!


    Η ΕΚΤ τα κάνει αυτά. Σήμερα!

    β) Η εξάρτηση των ελληνικών τραπεζών από την ΕΚΤ και τον ΕΛΑ αφορούσε πρώτα στην ΕΚΤ και μετά από τον ΕΛΑ. Σήμερα ο ΕΛΑ έχει τα 105 δις, τα 25 δις η ΕΚΤ και τα υπόλοιπα από MRO, LTRO operations. γ) Εξετάστε το επιτόκιο των προσφορών όταν έγιναν κάποιες MRO, LTRO παλαιότερα και σήμερα. Δείτε τέλος το κουτάκι στον ισολογισμό της ΤΤΕ του Ιαν ή Φεβ 2013 κάτω από τα LTRO, MRO.

    Αυτό το γράφημα θα αλλάξει!

    Σημείωση, οι ελληνικές τράπεζες έχουν βραχυπρόθεσμα ομόλογα άνω των 20 δις.

    3. O όγκος των κεφαλαίων που θα απαιτηθούν σε κάποιες τράπεζες με σημαντικό ρόλο στην οικονομία θα καθορίσει και τη μορφή συμμετοχής τους. Χωρίς να είναι καθόλου βέβαιο οτι θα γίνει, συνέβη και αλλού.
    Σημείωση τα hedge funds δεν έχουν παραπάνω από 15 δις τέλη Νοεμβρίου.


    Περίπου 25 δις ελλ τράπεζες και ασφαλιστικά ταμεία.

    4. Αν υπάρξει λύση διαγραφής τώρα- άμεσα έχει ένα Α κόστος, αν γίνει σε μερικά χρόνια υπό κάποιες προϋποθέσεις έχει Β κόστος. Το Α > Β. Ερώτημα αν επιλεγεί η Α λύση, η καλύτερη για την Ελλάδα από 01/01/13 την επόμενη μέρα πόσοι θα την ζητήσουν; 6-7 χώρες. Φτάνει το άνοιγμα για όλες ειδικά, των ισχυρών;

    5. Τέλος γράφεται και είναι τραγικό λάθος, υπάρχει ένα χρηματοδοτικό κενό για τη χώρα 7-8 δις. Αυτό το χρηματοδοτικό κενό αφορά εισαγωγές, πως θα καλυφθεί με μόλις 2,5 δις; Θα γίνει υποκατάσταση εισαγωγών; Κάτι άλλο;

  3. Yanis,

    I am still trying to understand what is going with the banking sector. I found that the buyback left the Greek banks with 4,8billions and with 4,2billions with the deffered taxation as a gift. So, the recapitalization costs for the private sector (if anyone wants to invest in this country anymore) 9billions less. Is this right? And if this scenario is true, this deffered taxation does not effect the income of the Greek budget making the deficit even bigger…?

  4. Pingback: Griechenland: Traurige Algebra des Schuldenrückkaufs | politropolis

  5. Φαίνεται νά υπάρχει μιά παρεξηγηση: Κατά τό άρθρο, ο στόχος είναι νά επιτευχθεί μείωση τού χρέουσ κατά 31 δις. Ομως πολλές πηγές αναφέρουν ότι ο στόχος είναι μείωση τού χρέους μόνο κατά 20 δις(επαναγορά ομολόγων αξίας 30 δις από τά οποία αφαιρούνται 10 δις πού θά δανιστούμε). Αυτός τουλάχιστον ο στόχος τών 30δις γιά μείωση 20 δις αναφέρεται στα:http://www.tovima.gr/finance/article/?aid=485709 , http://www.naftemporiki.gr/news/cstory.asp?id=2262422 , http://www.philenews.com/el-gr/Eidiseis-Oikonomia/29/125656/perithoria-ypsiloteris-symmetochis-stin-epanagora-omologon-vlepei-i-komision καί http://www.stockwatch.com.cy/nqcontent.cfm?a_name=news_view&ann_id=163154

    • Manoli:

      It’s the difference. You buy 30 Bil. worth of bonds using 10 Bil, and the net effect is 20 Bil. 30 – 10 = 20.

      So in essence Greece borrows 10 Bil over and above its debt with the purpose of retiring 30 Bil. outstanding bonds.

      The problem is this. Last time we did this back in March and “saved” 110 Bil. euros, it took us 8 months to burn through it. Our debt today (after the 44 Bil. new tranche) will be higher (367 Bil.) than it was pre-PSI (356 Bil). With a burn rate of roughly 14 Bil. per month, producing a temporary “savings” or 20 Bil. would only arrest our total debt increase by less than 2 months. After that the total Greek sovereign debt will increase further. And we are not talking here debt as a percent of GDP. You are talking about straight nominal debt.

      This graph is lagging, but tells you that Greek debt as a total is headed for record highs:


    • Dean – Correct me if I am wrong, but the Greek government did not burn through that much cash. The problem is the outstanding debt maturing and the government not being able to roll it over with the new debt without outside help.

      The latest deal allows the government to roll over maturing debt with 5/10/30 year debt.

      Of course the problem with this is that you have more and more debt coming due in the future ie it is postponing the default.

      As I have said all along what we are witnessing is the national tax collecting agency being kept on life support by foreign and domestic banks. If healthcare, roads, schools, the welfare of pensioners & those with disabilities fall the wayside that is collateral damage, the main thing is that the tax collector keeps operating. At all costs.

      But the biggest problem Greece has is that people misidentify the enemy. As Ilias so eloquently illustrated the majority of the Greek population are suffering from Stockholm syndrome. The citizens are blaming themselves rather than the people that have and are defrauded them. Namely the current and previous Greek governments/parliaments. They are the boots on the ground, they are the ones who have made it all possible.

      These Greeks need to be honest with themselves. They need to admit to themselves that they have been lied to. That they have been treated cruelly. That they are being abused by an entity which it says it cares for them.

      I know some of these people. People who are scared of losing their pensions having paid in tens of thousands of Euros. It is easy for me to say but you cannot negotiate with terrorists.

      When you have people who are blatantly telling you that they would rather see pensioners starve that sack a single sub 40 year old public sector worker you have to cut off contact.

      You cannot associate with a party that is prepared to use the threat of poverty as a bargaining tool.

    • Richard:

      I am not sure that what you said about maturing debt is true. In fact, I know it isn’t.

      Whether it is maturing debt that comes up for roll over or not, it was debt before and it continues to be debt after the rollover. Therefore, it does not affect the overall debt calculation. The only think it affets is the debt service. At what interest rate was the debt before vs. the interest rate after the roll over.

      Since the debt rate Greece is receiving is Euribor+0.5% or roughly 0.8% (< 1%) it is actually beneficial for Greece to replace old debt with new one. Therefore, I do not think that the source of ballooning debt are the rollovers. (If I had a debt servicing source available at 0.8% and rolled over all my debt this would result in a savings in my debt service but not the debt itself).

      The increasing debt is primarily to cover the new black hole caused by austerity (the German recipe). The international practice is never to repay the actual debt but simply to roll it over. It's the increasing GDP that helps to keep the debt to GDP ratio within acceptable range. As the graphs above illustrate none of the Euro countries has diminishing debt. The debt always increases but also does the GDP. Since the austerity has destroyed the Greek GDP, therefore Greece has perpetual unsustainable debt. If you want to keep Greece in an austerity regime then the OSI is the only way. What Germany is asking Greece to do today is pure nonsense. If you want austerity then you cut the Greek debt. Not other way around it.

    • Hello Dean – You explained that beautifully. You are correct, the rolling over of debt is not effecting the total debt.


      Your saying the Greek government debt is increasing by its debt by 14 billion Euros a month? “With a burn rate of roughly 14 Bil. per month,”

      That’s impossible isn’t it?

      The debt is increasing at a rate of around 20% of GDP minimum per year lets say. That is around 50 billion Euros a year…..

      All this is not making any sense. The word in the news is that the government deficit is 10% of GDP and yet the debt is increasing at 20%

      And your saying even more?

      Something is seriously out of wack here. I know the interest payments should take up 10% of GDP at some point between now and 2020.

      But from the graph you sent it seems it could be doing that already?

      Im confused.

      How much is the Greek government debt increasing per month?
      And does anyone know how much of that is interest payments as of today?

    • Richard the burn rate calc is as follows:

      Today we have the same debt approx. as we had pre-PSI. The PSI resulted (on paper) to a reduction of 110 Bil. euros back in March 2012.

      There have been roughly 8 months from the end of March 2011 (PSI event).

      Therefore the burn rate = 110/8 = 13.75 Bil. = approx. 14 Bil. per month average.

      This does not mean we burn 14 Bil. every month; it’s an average monthly burn rate. We may burn more or less depending what is maturing.

      The message you need to take from this is that a debt reduction of something like PSI2 would only last for about 2 months. After that total Greek debt resumes upward trend.

      The Google public figures on the graph do not include 2012 figures. If they did you would understand how little debt reduction has been accomplished.

    • Hello Dean – Okay thanks. One issue though. You say “we” burn through 14 billion Euro a month. That is not correct. The Greek government burns through 14 bill. The people are no the state. I think it is an important distinction to be made.

      Going back to the 14 bill figure. Something is not being reported. We are led to believe the gov has a 10% of GDP deficit. Your figures show this is clearly not the case. Not even close. Where is the black hole?

  6. Yannis, behind the Greek buy back debt, with the co-operation and blessing of our European allies, there is a strategy, isn’t it??? Greece is the ”good boy”, it does whatever the allies want, hoping that in (near) future (2014-2015) OSI will take place.
    POLITICALLY, Greece gives no chance to her allies to accuse it of anything or ”expell” Greece from EU! IF this actually takes place, why such a strategy is wrong? And in what (different) way, without pressure, would Greece proceed to all the necessary structural reforms on her economy? The past and the Greek political system say that it would NOT!
    So, why it would be so ”wise” to NOT implement actions, which our allies suggest, and being politically isolated in EU?

    • Stamos – Of course you are correct. No bailouts of the Greek government would have forced the Greek government to carry out the reforms immediately with the added bonus of Greece wiping its debt at the time of default. Default was a no brainer. Why the IMF, EU etc stopped the reforms is anyone’s guess.

  7. There is no need to print my comment:

    1.It is the sad of arithmetics and not of algebra. Algebra is something else.
    2.Definitely, the people who read you are eager to read your reply to that Gentleman in PROTAGON.
    3.I wrote a limited answer to him, demonstrating that he agrees with you that there will be missing an amount of 12,4 Bil. I do not see it posted in PROTAGON, yet.

    Thank you very much for clarifying so many issues that affect the future of our children, of our Country, of us.

    • Yanis – Your reply, re there being no growth with the current course. But lets pretend there is, where is the Troika/Eurogroup saying it is going to come from?

      My understanding is this.
      50 billion over 8 years out of the Greek economy, call is 0.5 billion a month
      Conservatively 1 billion Euro a month out of the economy due to the trade deficit
      Conservatively 1 billion Euro a month less in the economy due to reduction in gov spending
      Thats 250 billion Euro less in the Greek economy between now and 2020. Conservatively

      Is the Troika/Eurogroup saying that lending by Greek banks to the private sector is going to more than offset this 250 billion reduction?

      Or am I missing something?

      I fear not but it would be interesting to hear your devil’s advocate defence for the Troika/Eurogroup growth projections.

    • Yanis – Forgive me. I am just trying to understand how the Troika can give growth forecasts without out being cannibalized by every economist, commentator & newscaster on the planet.

    • The guy at protagon…suggests what … that banks wrote these bonds at a cheaper price in their books and now they will have profit. Why would they? When they can borrow money from ECB through these at a 100%.

    • He is saying that the second haircut of the private sector sends a signal to the same people to come and invest in Greece, and in the banking sector particularly?

  8. can the german parliament/public really be oblivious to what is happening here ? i suppose its been academic up to this point, but arent we approaching the point where the amount of debt Germany will have to eat in aggregate from all sources and programs for greek bailout(s) will rise to financial significance given stagnant German economy right now ?

    • The Eurocrats and their hanchman will do everything to preserve their centralistic socialist dream of a common currency. They do not care about the suffering of the Greeks or the cost to the Germans. They only care about their EU pension.

  9. Yanis – Your a Keynesian right? So given that the Greek government will be “reducing” its debt over the next 6 years where is the GDP “growth” going to come from?

    I mean, where is all this extra cash going to come from?

    From an Austrian view point I would say Keynesians could hypothetically depend on banks lending more and more money into the private economy but I dont think anyone believes this is going to happen.

    And with regards to a gold standard like economy, doesnt GDP growth become a meaningless and pointless? Surely this figure will be stable just like the quantity of gold in existence. Would you say deflation becomes the measure of economic prosperity in a gold standard economy?

    • No, I am not a Keynesian. I appreciate Keynes’ insights regarding the fallacy of composition, the liquidity trap and his greatest contribution, namely the idea that savings do not necessarily feed into investment. On the question of where growth will come from in Greece, allow me two comments. First, it is wrong to think that more debt is necessary for government to spearhead growth. Government, during a slump, can help bring growth while reducing debt – as long as it uses the state’s capacity to mobilise existing, but idle, savings and convert them into productive investments. Secondly, regarding Greece, there will be no growth as long as the present policies are pursued. At least nothing more than the dead cat’s bounce.

    • According to Meinhard Miegel, the days of everlasting growth are over anyway, almost everywhere. I share since long this point of view. And since long I ask the economists, how currency unions and nations must change (they must, there is no dobut about that).

      So they can still provide a decent standard of living (we must accept it won’t go up anymore as it did for our parents) to their population. And this w/o much or any growth at all.

      Do I need to add that non of them economist experts, no matter if fresh- or saltwater school, had a convincing answer?

      In German, but inside are some english language pages: http://www.denkwerkzukunft.de/

    • “Government, during a slump, can help bring growth while reducing debt – as long as it uses the state’s capacity to mobilise existing, but idle, savings and convert them into productive investments. ”
      Im not sure i understand how it is possible for the government to deleverage when the private sector is trying to do the very same thing and a current account deficit coexists.After all thats exactly what is happening now in Greece.Both public and prv sector are simultaneously trying to deleverage.The paradox of thrift at its finest.

    • You will. This is not the first time this particular gentleman has ‘savaged’ me based on nothing more than personal insults and bad analysis.

    • Yep but there’s a huge difference with UK, as the UK still has it’s own currency.

  10. No plan can be so insane.So could there be another plan to be read between the lines:E.g. To keep Greece and its nationally tied capital in a bankrupt state until all gas and oil are appropriated at Mnimonio prices and under its terms.That seems very rational for whoever has been advancing the plan.

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s