Greece’s bond buyback scheme failed to meet its target by a relatively narrow margin on Tuesday but still left international lenders with a €450-million hole in their plan to cut the country’s huge debts to a more manageable level.
Euro zone finance ministers will discuss the shortfall in the scheme, under which Athens is buying back government bonds from its private creditors at steep discounts, in a conference call later on Tuesday, officials said.
The result indicates that Greek debt would fall to around 126.6 per cent of its annual economic output in 2020 – well down from the 189-per-cent forecast next year but slightly above the 124 per cent that was agreed with the International Monetary Fund last month as sustainable.
Greece extended the deadline for creditors to offer back their bonds from Friday to Tuesday, but a finance ministry official said the buyback offer would not be reopened, adding that technically it had been a success.
The buyback calls for Greece to repurchase debt worth about €30-billion using €10-billion from European funds at prices well below the bonds’ nominal value, cutting debt by a net €20-billion.
That would account for half of a broader debt-relief package that lenders agreed for Athens last month, ensuring that the IMF stays on board with the country’s international rescue.
Greece became the first euro zone country to seek an international bailout in 2010 but it has repeatedly failed to meet budget and reform targets set by the European Union and IMF as its economy has slid into a severe recession.
In the buyback, bids totalled €31.8-billion, a senior euro zone official said after the deadline, but the average price paid for the bonds was slightly above expectations, meaning the total debt reduction will be less than planned.
A banker involved in the operation confirmed the figures, saying that the average price paid for the bonds purchased was 33.5 cents on the euro.
The marginally higher-than-forecast price means the operation had the shortfall of around €450-million ($585-million U.S.) and total debt reduction would be around 9.5 percentage points of GDP by 2020, less than the targeted 11 percentage points.
Private bondholders already had to accept huge reductions in the value of their debt holdings under a restructuring earlier this year, whereas Greece’s official creditors have refused to accept similar treatment.
“What’s clear is that despite the statement by European leaders that the original Greek debt exchange was a unique event and not to be repeated, the political reality is that where there is a need for debt relief the private sector will be repeatedly asked,” said Hung Tran, deputy managing director of the Institute of International Finance.
“The message this sends is that private-sector investors are effectively subordinated to the official-sector creditors. That will have a detrimental impact on the creditworthiness of sovereign debt,” said Mr. Tran, who was involved in negotiations for the original Greek debt swap.
The banker, who spoke on condition of anonymity, said it would not be difficult to find further bondholders who might sell their holdings to make up the shortfall.
“The amount could be tapped from German bad banks – they have not tendered all of their holdings,” the banker said. “The IMF will not let go easily knowing that there are bonds that haven’t been tendered. Greek banks offered almost all they had.”
Officials said they did not expect euro zone finance ministers to issue a statement after their conference call. Instead they will meet in Brussels on Thursday morning to discuss the results of the buyback operation.
Athens extended the deadline to tender Greek debt under the scheme after the amount initially offered by the original Friday deadline stood at €26.5-billion.
Greek banks, which had tendered only about 60 per cent of their roughly €17-billion in sovereign debt holdings by Friday, offered all or most of their holdings to ensure the buyback hits its targets, senior banking executives told Reuters.
Greek lenders had initially been reluctant to put up their entire holdings, fearing losses over the long term, but now have little choice but to do more since most of the aid unlocked by a successful buyback will go to boosting the lenders themselves.
“Greek banks were caught between a rock and a hard place,” Athens-based lender Eurobank said in a report on Tuesday.
Athens had set a price range for the buyback at a premium to market prices at the time. The range varied from a minimum of 30.2 to 38.1 per cent and a maximum of 32.2 to 40.1 per cent of the principal, depending on the maturities of the 20 series of outstanding bonds.
Hedge funds, which bought the debt at rock-bottom prices when it was feared the country would exit the euro, are estimated to hold a large part of Greek debt and the offer was seen as likely to earn them a tidy profit.
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