Germany floats idea of Greek 25-cent-on-euro debt buy-back

Mon Nov 19, 2012 12:24pm EST

* Buy-back would be voluntary, cut Greek debt by 11 percent of GDP

* Lawyers preparing briefing for euro zone meeting

* Germany, others, support cutting interest on bilateral loans

* Germany, others support raising Greek primary surplus target to 5.0 pct/GDP from 4.5 pct in 2016

By Jan Strupczewski

BERLIN, Nov 19 (Reuters) - Germany wants Greece to buy back half of its outstanding bonds from private investors at 25 percent of their value as one way to reduce its unsustainable debt, a source familiar with preparations for this week's euro zone talks said on Monday.

The voluntary proposal would leave private sector holders of Greek debt who have already seen most of their investments wiped out with just cents per euro, even while euro zone countries demand 100 percent of their principal back for official loans.

Euro zone ministers are due to meet on Tuesday to discuss efforts to ease the debt burden from Athens.

The German proposal, which was floated in preparatory talks among officials, would allow Greece to reduce its debt burden, forecast to reach 190 percent of gross domestic product next year, by more than 11 percentage points of GDP.

Greece is struggling to reduce its debt from levels seen as unsustainable even after the biggest restructuring ever of public sector debt in March, when private creditors took a "haircut", wiping out most of the value of their bonds.

Even after the restructuring, there are still about 60 billion euros worth of Greek bonds in private hands, equivalent to about 30 percent of Greece's GDP. The rest of Greece's debt is held by "official creditors", including other EU countries, the international monetary fund and the European Central Bank which have paid for two bailouts.

Euro zone officials and the IMF have yet to reach agreement on whether to demand Greece bring down its debt-to-GDP ratio to 144 percent by 2020 or give it until 2022. Greece wants more time, arguing that cutting spending and raising taxes too fast are wrecking its economy and only making the debt burden worse.

Berlin, which is the biggest contributor to Greek emergency lending programmes, believes the 7.5 billion euros needed for a voluntary debt buy-back could be financed half by Greece and half from profits that the ECB is to make on its Greek bonds.

These ECB profits, under a deal from February, were to be handed over by euro zone central banks to euro zone governments, which would, in turn, give them back to Greece.

Some other countries support the idea of using profits from the ECB's Securities Market Programme (SMP) of bond buying to finance a Greek debt buy-back, said the source, who is familiar with discussions among euro zone officials ahead of the talks.

LAWYERS CALLED IN

The European Commission and the euro zone's new bailout fund, the European Stability Mechanism (ESM), are working out how a bond buy-back could be done. EU lawyers are preparing a legal opinion for a Tuesday meeting of euro zone ministers.

The lawyers are examining whether a voluntary buy-back would trigger collective action clauses (CACs) on the bonds, under which a debt restructuring agreed by a majority of bondholders would be binding for all.

Euro zone officials are also considering lowering the interest on bilateral loans to Greece issued under its first bailout, and lengthening the maturities of the loans.

The interest now stands at 150 basis points above the costs of raising the money for Greece. The source said there was support for lowering that interest by more than 70 basis points.

There is agreement among euro zone officials that there should be no "haircut" on the principal of the loans to Greece, called in EU jargon Official Sector Involvement (OSI).

Other debt-cutting steps under consideration include extending loan maturities or reducing fees charged for lending by the temporary bailout fund EFSF. Euro zone officials believe these steps could cut the debt ratio by around 20 percentage points, taking it closer to the originally-targeted 120 percent which is seen as sustainable, the source said.

The IMF still favours 2020 as the debt sustainability target to maintain market confidence in the programme. The euro zone wants to give Athens two more years because a deeper than expected recession and delays in reforms have taken Greece too far off track.

Under the deal struck in February, Greece was to reach a primary surplus of 4.5 percent of GDP in 2014, a level that would allow it to start reducing its debt over the years in a sustainable way.

Last Monday euro zone ministers decided the target would be moved to 2016. Some countries, including Germany, want to increase the Greek primary surplus target for 2016 to 5.0 percent as a result, the source said.

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Comments (1)
dareconomics wrote:
While progress is being made here, it is not the right type. No one ever thought that the Eurozone would fail to create a plan amongst its members to kick the Greek can further down the road. The main issue is that the IMF is insisting that the troika adhere to the original debt reduction target, 120% of GDP by 2020.

The German-led Eurozone has run out of fudges. Time is money, and by delaying Greece’s restructuring program a €44bn funding gap has emerged. This shortfall must be filled in order to keep Greece on its debt restructuring timetable.

The problem is that the Eurozone and ECB will have to take a write-down on its debt in order to reach the target. German Finance Minister Wolfgang Schaeuble has decided that this would be “illegal” because it amounts to the financing of a fellow Eurozone member.

The ECB’s bond purchases under the SMP and soon to be activated OMT are financing of governments, too, but this fact has not stopped either program. What is illegal is a matter of convenience for the northern tier.

The issue here is that these governments, particularly the Germans with an upcoming elections, do not wish to withstand the fallout from throwing more money down the Greek hole. Hence, the one method that would assure a sustainable path is summarily rejected by the northern tier in favor of more gimmicks.

A new idea being floated by the Germans is another private sector cram-down. I would argue that taking private investors money via a “voluntary” buy back of their bond holdings at “market” value would be illegal, but the Germans do not see it that way.

Recall that the Greek bailouts so far called for voluntary participation, which was anything but. ISDA would eventually determine that participation was not voluntary creating a default event triggering credit default swaps. It looks like we will travel that road again.

The larger problem with a voluntary exchange is that speculators now see European money on the table. In response, they will begin purchasing Greek bonds, and this action will bid the price up so that the Greece’s realized savings shrink. This money will have to made up somewhere.

Even if the Eurozone agrees to the latest can kicking exercise, the IMF still has to approve the new plan. Complicating the picture is that its emerging market shareholders believe, and rightly so, that the Europeans are being treated with kid gloves and that the developing countries would never have been allowed to get away with multiple bailouts and a very generous sustainability goal.

The IMF will have to stick to its guns here, and it believes that without debt relief Greece’s debt to GDP ratio will reach 150% by 2020. There is no deal without the consent of the IMF, despite what the FT writers think:

AN emergency meeting of the government’s Christian Democrat supporters in the German parliament has been summoned for 8.30am Wednesday to discuss the Greek rescue package, in an indication of government confidence in reach a deal on Tuesday evening.

Look for the Eurozone to agree to a deal amongst its members, which the IMF will refuse to approve. The 4th Iron Law of the Eurocrisis will be put into play— nothing ever gets done without creating a crisis first.

The brinkmanship will continue for several weeks until Greece is just about to run out of money. By this time, gyrating markets will give Merkel the fear she needs to ram the IMF deal through the Bundestag.

dareconomics.wordpress.com

Nov 20, 2012 9:08am EST  --  Report as abuse
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