Greek Debt Buyback – another sad verdict, surrounded by much merriment

Greek authorities have announced that the Dutch auction has produced offers of 31.9 billion worth of (post-PSI) Greek government bonds at an averaged price of 33.8% of face value. The same sources reveal that the Greek banks were strong-armed into offering all their holdings (against their better judgment), a total of around 17 billion. Which means that hedge funds and other privateers chipped in another 14 billion approximately. At this high price, the Greek government cannot afford to accept all the offered bonds, as it has only 10 billion to spend. Thus, unless it borrows more from the EFSF, it will accept around 29.5 billion of the offered bonds and will, thus, achieve a net debt reduction of around 19.5 billion. The Greek media, as is their wont, are celebrating the success of the buyback (just as they were celebrating the successful PSI last February and all the loans that Greece received in the past three years). Is there a foundation for these celebrations? None whatsoever, I say. Here is why:

In effect, what has happened is that the Greek state, in order to receive around 24 billion in loan tranches on behalf of the Greek banks (24 billions that will be pumped into the Greek banks as part of the pre-agreed recapitalisation), has effectively imposed upon them a savage two-pronged haircut in the order of, give or take (and depending on present value calculations),16 billion euros! How come? Here is how: Government bonds with a face value of approximately 17 billion were swapped for EFSF bonds worth 5.8 billion. Moreover, having been forced to hand over their total holding of Greek government bonds effectively kissed away around 5 billion of expected coupon (or interest) payments. All up, approximately 16 billion.

Pro-buyback commentators dismiss the above claim by arguing that Greek banks were already marking these bonds down to 22% of face value and, therefore, the buyback operation left them better off. This is absurd. First, whether these losses had been factored in the banks’ recapitalisation needs is irrelevant to the plain fact that their holdings of Greek government debt were savagely haircut. A haircut is a haircut regardless of whether you have accounted for it. Moreover, for the purpose of Basle III and EBA audits, the banks continued to count 100% of these bonds as part of their tier 1 capital. Proof of this is that Greece’s banks have been, until now, posting these bonds with the European System of Central Banks (via the Greek ELA) as collateral, receiving liquidity at 70% of face value. This liquidity has now been lost to them too; a loss of more than 5 billion of liquid money for a banking sector that is utterly unable to support the circuits of credit in the imploding Greek social economy.

So, the only argument that can be made, to the effect that the losses had been factored in already, is that their recapitalisation needs (to be covered by the EFSF) had taken into consideration a major haircut. You may believe this if you want but it would take a heroic disposition to do so. Take for instance Spain’s banks. We all know, it is common knowledge, that their black holes are much, much higher than the 40 billion that the EU has just pumped into them. Similarly with the Greek banks. Their capital needs have been grossly underestimated independently of whether their holdings of Greek government bonds were marked to market or not. With this debt buyback they have lost all potential gains from a future recovery of their government bonds, all the anticipated interest-coupon payments, plus their day-to-day liquidity mentioned above. When the recapitalisation takes place, courtesy of the Greek taxpayer who will be borrowing from the European taxpayer (via the EFSF) on the banks’ behalf, these newly borrowed funds will disappear with certainty into the Greek banks’ gargantuan black hole (as bankers, eager to retain their control over their banks, will hoard every penny).


The Greek state was forced to haircut the Greek banks to the tune of anything up to 16 billion, in present value terms, in order to get its hands on 24 billion of EFSF loans that it will hand over to the same banks.

The haircut was necessary to pacify the IMF’s (understandable) penchant for debt-reduction (Greek government debt will be cut by a little less than 20 billion) but it will, tragically, ensure that the 24 billion that the Greek government is about to borrow from the EFSF to give to the banks will disappear without a trace (from the perspective of the Greek macroeconomy).

So, all in all, the state’s debt will have risen, in net terms, by between 4 and 5 billion (24 billion new debt on behalf of the banks minus the 19.5 billion of net debt reduction, following the buyback) while the nation’s banking system will remain zombified ad infinitum.

And yet, this absurdity will be celebrated as a successful sovereign debt reduction and a promising bank recapitalisation. When, in the next 6 or 12 months, Greece will be, once again in the headlines, with talk of a new ‘program failure’, you will know why!

34 thoughts on “Greek Debt Buyback – another sad verdict, surrounded by much merriment

  1. Pingback: Hinweise des Tages | NachDenkSeiten – Die kritische Website

  2. Yannis,

    it is of no doubt a no-rescue plan, all this that the Greek economy is undergoing! The very word economy is a misuse, as borrowing is forced under no “economy” at all!… We will all have the courage to say no to any more government loans, given the fact that the black whole swallowing the funds leaves nothing to build upon. This is evident from another fact: that no accounting has been given up to now, where all these funds are allocated and with what ROI! – and this is for good reason… I assume we will have to wake up from the media-imposed hallucinaton of no-exit loan-abuse ecstasy and get rid of all that is alien to our nation’s survival. The time has come – don’t you think?

    George Raikos

    • George – The time has come around 3 years ago. To be fair the Greek private sector would have put the government out of business by now but the government is getting help from outsiders with deep pockets. Unfortunately the private sector does not have such a sugar daddy.

      About the mass hallucination. I wrote elsewhere on this blog but let me repeat.

      With this new plan, over the next 8 years Greece will conservatively see around 250 billion Euros leave the economy through debt repayments, reduced wages, reduced pension payments, reduced benefit payments and the trade deficit.

      The Greek economy (GDP) as of the 3rd quarter of 2012 is around 270 billion Euros.

      Hallucination is too kind a word, it is a mass psychosis affecting the media, politicians and the population at large.

      There is no way this plan is going to work out, no way, it is impossible. Something is going to have to give. The Greek economy cannot operate with a GDP per capita of 2,000-3,000Euro. That is not even enough to pay the taxes! Without taxes, possibly, but not with.

      Going back to your point regarding getting rid of the alien. Like I said at the start, the Greek public have been doing as much as they can by starving the government of tax revenue through reduced spending and wage cuts. Pre-Euro this would have been enough to get rid of the Alien and at the very least reform the alien. But again, like I said at the start, the alien is getting outside assistance on a massive scale.

    • Richard:

      Your math is wrong.

      The official population of Greece is 9.3 Million as of the latest official census.

      270 Billion euros (GDP) divided by 9.3 Mil. = 29,032 euros per capita.

      Some have suggested that the Greek population is 10.5 Mil. but only if you include illegal migrants.

  3. Dear Yanis,
    Can you please estimate the consequences of the Greek debt buyback on the the two main Cypriot Banks. How does the buyback affect their liquidity and how does it affect the total capitals that are required (compered to those required prior to the buyback) for the their upcoming recapitalization through the expected financial aid from the “troika” and hence, on whether it is worsening the sustainability of the Cyprus’ debt?

    • Haris – If I can chime in. Its very simple, you cannot fix a debt problem by taking on more debt. Extrapolate from this premise. I can tell you the official line will be that “the deal has helped the balance sheet of the Cypriot banks immensely and will allow them to work through their short term financing issues with minimum disruption to the Cypriot economy. The deal also gives Cypriot banks the time they need to reorganize their activities into a sustainable model in keeping with the new economic environment of the Eurozone. In short it is a win-win situation for all parties concerned”.

  4. In essence Greek savers are once more bailing out foreign creditors. In the process domestic debt is transformed into foreign debtn the cash flow profile is not significantly altered and the room for manoover of any future government is significantly diminished. As correctly pointed out the capital needs of the banks have risen after the new haircut and the Greek state will have to borrow more money from the EFSF for the recapitalisation at terms which are uknown and might be even worse than the ones of the tendered bonds.
    Intrenal devaluation of labor is fillowed by internal devaluation of capital.

    • Eri – Your right on the money about Greek savers bailing out foreign investors. You can also add to that Greek workers and assets holders are/will be bailing out foreign investors.

      However, you make one massive error and it stems from a newspeak term of the Troika and media. Namely “internal devaluation”.

      The term devaluation is an insult to the intelligence of everyone. It has connotations suggesting it is to do with a currency and this paints a humanitarian face on an inhumane and artificially created collapse.

      What is happening in Greece is a reduction in the money supply. A physical extraction of wealth out of the country.

      The goal being less Euros chasing products and services will lead to a reduction in prices. Everything else being equal it could work.

      Except the physical quantity of cash in circulation is being reduced while prices are increasing. Yes increasing. Why? Because taxes are increasing at an unprecedented rate.

      Greece is a much more expensive country today than it was in 2007 despite the fact that the GDP is over 20% less.

      There is no “internal devaluation” happening in Greece, it is theft.
      And the current course being plotted by Greek politicians leads to poverty.

  5. Thanks — I saw the news & was wondering at what your take on it would be.

    Right now, Italy seems to be at the top of the charts, but I also saw a tidbit about how the German economy will turn out to be in recession this quarter, but (of course) it will start to bounce back next quarter.


  6. Quite right Yani! 100% on target!

    And to state the obvious such wretched state of the Greek banks rules them out completely as enablers and facilitators of a growth policy.

    You can kiss such notions goodbye and Tsipras ought to expose this Samaras abominable failure. This is exactly the opposite of what Samaras promised.

    This is not a government we have in Greece at the moment. It’s a dealership of Made In Germany fabrications, utterly unable to produce anything positive other than complete chaos.

    • My friend, Tsipras is but a false prophet (or should I write ‘profit’). Some of his mayors are running around protesting for the sake of protesting while their municipalities are diving head first into insolvency. Syriza, unfortunately, cannot offer a viable alternative as their MPs are already arrogant (see recent TV rants and tantrums). Tsipras sounds as good as A. Papandreou sounded to people back then. Also, as to not be confused and labeled as supporting any of the other parties, I must say that none IMHO offer a cure for this debt disease.

    • 2012 – Default is the only solution. Any politician who says differently cannot be taken seriously. Any politician who says the answer is for Greece to have a begging cup in order to receive cash from foreigners is a danger to the Greek population.

    • 2012GR:

      You misunderstood my comment. I didn’t suggest Tsipras in government.

      All I suggested is that Tsipras as the legitimate opposition party to call on and highlight the Samaras fiasco.

      The last thing you want at this point (assuming you care about the Greek citizens) is to leave the false impression of an accomplishment (which Samaras already tried) while denying the truth of what really happened.

      The last thing you want is a lethargic government and a lethargic opposition allowing issues to go over their head, while engaging in the usual Panathinaikos vs. Olympiakos type of Greek politics.

    • I thought Samaras was going to kick Merkel’s butt because he is her biggest enemy ?

  7. One could also say that Greece was/is facing a bankruptcy so the marked down bond holdings by the banks would require even more depreciation. Without buyback, bonds are worth 0% due to bankruptcy, with the buyback they are worth 33,8%.

    What I don’t understand about this buyback program is that it is again a maneuver where private sector holdings (banks, funds, insurance companies) sell their assets to government holders (EFSF). The whole debt of Greece is moving to the public sector of the EU.

    The main reason for this I think was that saving Greece was sold to the (German) electorate as something that is not going to cost real money. They are trying all to hide the enormous costs in guarantees, very long term loans to an insolvent country, ECB holdings, etc. If Germany starts paying real money and taking real losses because of Greece, the whole saving Greece business is going to become a major topic for the federal election campaign which nobody here really wants. During campaign, common sense is suspended, it’s all about scoring cheap points.

    • Dean & Richard – Agreed 100%

      Achim – Germany will not lose from this situation barring the scenario in which club Med drags them down, but Germany always has the option of going it alone possibly with a couple other “surplus nations”. My opinion is that the German government is looking for a scapegoat for their 0% increase in wages of the past decade and other policies which have brought them to their present status of industry powerhouse and they have found it in Greece. Of course, it is not as simple and there is much more to it, but in a nutshell, it’s smoke and mirrors.

    • My guess is that Germany is going to try to save herself not long from now.
      Considering their Greek experience i would say that you must start to worry.
      Of course Greek is being moved to the EU public sector. This is happening since 2010

  8. “Understandable” it can be only in view of the IMF’s history. It isn’t ‘understandable’ in any normal sense. This seems to have been a good deal for the EFSF. Spend 24, Get back 16 immediately. Nice. The payday loan companies in the UK are not unlike this. Loan a few thousand and charge 4k+% interest. Yes, 4k+%. No more weasel popping here. We are in mafia territory here. And some people thought it could only happen in the movies.

  9. “Understandable” it can be only in view of the IMF’s history. It isn’t ‘understandable’ in any normal sense. This seems to have been a good deal for the EFSF. Spend 24, Get back 16 immediately. Nice. The payday loan companies in the UK are not unlike this. Loan a few thousand and charge 4k+% interest. Yes, 4k+%. No more weasel popping here. We are in mafia territory here. And some people thought it could only happen in the movies.

  10. There is one thing I simply cannot understand. This is so obvious. Why does the Greek government agree to one absurd idea after another? To get the tranche of money? Is it really worth destroying your economy, as they already have, now making your banks’ position even more precarious, at the cost of reducing what is left of the economy to pulp through the criminal new tax law that will drain every last penny out of consumption and reduce many more households to penury?
    The Euro at any cost. But if the cost is the very human rights and survival of your people, does it make any sense?
    I remember when Stournaras took over the Ministry of Finance that you painted a favourable picture of him and indeed from various interviews he had given he did indeed seem to be someone who “knew his stuff”. But what are we to make of this continuing catastrophe? When asked on a TV interview (as Minister) how did he expect to raise the revenue of an extra 2 – 3 billion from taxation when the Greeks are already beyond their limits and some 11 billion in expected taxes for 2012 simply have not materialized, because the money isn’t there. He answered quite coldly crudely and nonchalantly, “it has to be done.”. No why, how nor wherefor. Simply “it has to be done”
    Why do they insist on knocking their heads against a brick wall in this way? Perhaps because it is not their heads they are knocking but ours.

    • @ Parina
      You ask all the right questions because you are a decent person concerned about the welfare and survival of a country and people. I am right behind you.

      However what is going on is about the survival of the euro at all costs, the survival of the german CDU government for now, and most important the coming move toward fiscal consolidation in the EZ and EU, with accompanying loss of sovereignty, as ‘we’ move toward Brussels’ desired superstate. After all the fiscal parts are in place, maybe after 5 years, Brussels will consider increasing the democratic accountability. Or so it claims….

      This is not scaremongering, please go to the EU websites.

      In our future Europe, if all goes to plan, Brussels will administer the former states (states in name only) from the centre as a series of provinces with dictated economic roles and budgets.

      Meanwhile, to prevent Greece becoming a pariah state, and to keep on paying its bills, the elected government plays along with this At All Costs.

    • Elentis – I think you are on the money. I do not believe these people are so stupid as to believe this is going to end well. Given the nature and direction of EU policy you would have to say control of the nations will end up in Brussels.

      The KGB had a 4 step plan to assimilating a population of a state so they would accept Moscow.

      From what I am seeing you would have to say the Greek economy is being deliberately destroyed in order for the EU to ride into the rescue on condition they take control of the economy. This will be called “normalization” and Greeks will welcome it.

      About Greek politicians, from an outsider looking in you would have to say it is a condition of their employment that they serve the USA and the UK over and above the Greek people. If there is any doubt with regards to how easy this is to implement and maintain I encourage anyone to read the autobiographies of retired army elite

      This is an excellent place to start

      This is also excellent book regarding the installation of the current Rwandan government.

    • Patrina – Yanis likes to give Greek & EU politicians the benefit of the doubt. ie they are stupid and/or they are being manipulated.

      Yanis’s answer is the ECB to have more control over economies and the nation banks with the governments having less control of the finances to cut out corruption and inefficiency.

      As I have said here many times before, this is exactly what the ECB wants. What Yanis is unable to acknowledge is that he is responding to the manipulation in an exactly predictable manner. Yanis’s response to the crisis is exactly what the ECB wants people to think.

      ie in order for people to welcome ECB control you have to have people believing their politicians are completely corrupt/stupid/misguided and the answer is to have technocrats in charge because they know what they are doing.

      I believe Yanis has fallen into this trap far too easily.

      The ECB is the main cause of the Greek government’s problems today. That is almost definitely a fact. We have their documents and they do not claim they are fake.

      Yanis needs to look at the current situation in Greece and Europe from the ECB’s point of view. Yanis needs to say to himself, “If I were the ECB and I wanted to take control of the European banking system and install a recycling mechanism, what would I do to sell this idea to the public?”

      And I would put it to Yanis, he would have all the players doing the same things they are now. The problems being created are artificial and the only solution to this artificially created crisis is what Yanis is proposing ie the ECBs goal.

    • No. Not as usual – but for a change, absolutely correct 🙂

      Yanis is right with this analysis. What I’ll never get is how come he nevertheless believes in a lot of other financial alchemicae which is very much alike the one done here with this 2nd haircut.

    • Richard – Exactly! I might add that the E.U. will never work. Well, I shouldn’t say never… Only when “we keep f&(#ing until we’re all the same color” will it work. (From the movie ‘Bullworth’) Meaning that due to such extreme national/cultural differences, the E.U. is not viable. It’s like trying to force a marriage to work when the husband and wife are as different as night and day. It never works. Therefore, federalization under Brussels bureaucrats can only lead to tension and ultimately, breakup. A banking union is like taking the aforementioned couple to a marriage counselor. It’ll only glosses over the differences on the short term.

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