Greece said it would spend €10-billion ($13-billion U.S.) to buy back bonds in a bid to reduce its ballooning debt and unfreeze long-delayed aid, setting a price range above market expectations to ensure sufficient investor interest.
The bond buyback is central to the efforts of Greece’s foreign lenders to put the near-bankrupt country’s debt back on a sustainable footing, and its success is essential to unlocking funding Athens needs to avoid running out of cash.
There have been questions about whether it will tempt enough bondholders to cut Greek debt by a net €20-billion euros, the target set by euro zone finance ministers and the International Monetary Fund. The buyback plan announced on Monday appeared designed to quell those concerns.
“It indicates they really want the swap to succeed,” said Ricardo Barbieri, strategist at Mizuho, on the pricing.
“Some investors might be tempted to participate in the swap because of the ability to simplify their position, should they wish to maintain exposure to Greece, otherwise an opportunity to exit totally, completely their positions at a level that is better than Friday’s close.”
The buyback will be conducted through a modified Dutch auction that introduces an element of competition among investors and set a price range above Friday’s closing prices.
The range set varied from a minimum of 30.2 to 38.1 per cent and a maximum of 32.2 to 40.1 per cent depending on the bond maturities of the 20 series of outstanding bonds.
It featured a spread of two percentage points between the highest and lowest price offered on each bond.
The prices were well above the levels Greek bonds eligible under the buyback closed at on November 23, even though Greece’s lenders last week said they did not expect the bonds to be purchased for more than the closing price on that date.
The bonds, which have a nominal value of €63-billion, closed at between 25.15 to 34.41 cents in the euro on that date according to Reuters data.
That price range had been rendered irrelevant after Greek bond prices rose subsequently in the secondary market, forcing Athens to offer a higher range to ensure sufficient interest, a Greek finance ministry official said.
Athens said it would not spend more than €10-billion euros on the buyback. Investors must declare their interest by Dec. 7 and the expected settlement date is Dec. 17.
Greek government bond prices rallied sharply on the news, with bond prices rising across the strip.
In a Dutch auction, if a bondholder tries to get a price close to the upper limit there is a risk he or she may be left out if the buyback amount is filled at lower prices. There will be one settlement price for each series of bonds.
Euro zone officials said the bloc hoped Greece would be able to repurchase at least €40-billion of its own bonds.
Athens unveiled the structure of the buyback before a meeting of euro zone finance ministers, at which Greek Finance Minister Yannis Stournaras will brief his counterparts.
Despite the better than-expected terms, some analysts said it remained to be seen whether the buyback would be successful. Greek banks are under pressure from Athens to participate, but there is skepticism over how many foreign investors will do so.
“I still have my doubts regarding how many investors will participate on the buyback at these prices,” said Diego Iscaro at IHS Global Insight. “The prices may be higher than expected .. but my doubts are whether they’ll be high enough to encourage a high participation rate.”
Even if the Greek debt buyback is successful, Athens’ long-term debt problems have yet to be fully resolved. Greece’s EU and IMF lenders want to cut the country’s debt – which is expected to peak at 191 per cent in 2014 – to 124 per cent of gross domestic product by 2020 but there has been speculation that some write off of loans will be necessary.
German Chancellor Angela Merkel said on Sunday that Greece’s creditors may look at writing down more of its debt but not before the current bailout program has run its course.
So far, Berlin has insisted a writedown of Greek debt held by euro zone governments would be illegal, though its finance minister has also recently signalled that some kind of debt ‘haircut’ for official lenders might be needed eventually.
“If Greece one day handles its revenues again without taking on new debt, then we must take a look at the situation and assess it. That is not going to happen before 2014/2015 if all goes to plan,” Ms. Merkel told the Bild am Sonntag newspaper.