* Restructuring Greek banks to bow to the inevitable
* Hedge funds seen cash out
(Adds interactive Greek bond buyback calculator)
By Alex Chambers and Christopher Spink
LONDON, Nov 30 (IFR) - Greece's bond buyback, expected to be
unveiled on Monday, has a high chance of success given the large
proportion of state-connected holders and the chance of a
profitable exit for hedge funds that bought at low levels over
Greece is targeting up to EUR68bn of bonds by face value as
it seeks to cut its total debt by at least EUR20bn before
December 13. It is required to do so in order to secure
continuing support from the International Monetary Fund and so
allow the disbursement of the latest EUR34bn tranche of loans
under the country's bailout programme.
The vast proportion of that money, about EUR24bn, is
earmarked for Greece's beleaguered banks, which remain the
largest private-sector holders of Greek government bonds. Those
banks are likely to feel that they have little choice in
accepting the offer, as to decline would only delay their own
recapitalisation. Some may even make a profit (at least in
accounting terms) as the bonds are believed to be held at less
than 25% of par in some of the banks' books.
Around EUR62bn of the bonds in Greece's sights were issued
via March's private sector involvement (PSI) debt swap exercise
and many of the holders are state-related institutions across
Europe. They may be pressured by their governments to agree to
Cypriot banks, whose government is currently in talks with
the eurozone about its own bailout, have large holdings of Greek
bonds. So do Dexia, rescued by France and Belgium, and FMS
Wertmanagement, the German state work-out vehicle for Hypo Real
Roughly EUR20bn of PSI bonds are in the hands of these Greek
and Cypriot banks or other eurozone state-connected
The buyback's dealers, Deutsche Bank and Morgan Stanley,
will use a Dutch auction to create competitive price pressure.
The buyback starts on Monday next week.
Eurozone leaders announced this week that the prices paid on
purchases would not be greater than those prevailing at the
close of business on November 23 - mostly less than 35 cents on
The European Financial Stability Facility is expected to
lend Greece EUR10bn to pay for the buybacks, meaning (if it pays
30-35 cents on the euro) it will be able to repurchase about
EUR30bn of bonds - cutting its debt by the required EUR20bn in
However, given that only half of the outstanding stock of
debt needs to be repurchased for the exercise to be deemed a
success, Greece may get away with paying much less than that
There has been significant trading in the new Greek bonds
since the EUR206bn PSI debt restructuring, under which
bondholders received notes from the EFSF, worth 15% of their old
par value, and 31.5% of new Greek bonds maturing over 20 years
Prices on the restructured debt - the 2% 2023 is the most
traded bond - have also risen sharply from 11 cents on the euro
in July to just under 35 cents this week. Hedge funds started
buying when the odds of a Greek default fell and the odds of a
buyback rose, and they may feel now is the time to cash in their
"This is probably the last opportunity for a meaningful
liquidity event for investors for a long time," said a banker.
Bondholders may also feel that it is better to exit at a
profit now, rather than risk being caught up in another forced
restructuring down the road.
One large French institution said that it had sold the very
liquid EFSF notes and also divested the strip of Greek bonds
picked up after March's debt swap.
No restructuring of the official sector debt is currently on
the table, beyond extending these loans' maturity and reducing
their interest rate. But a nominal haircut at the Paris Club is
seen as likely at some point, and this might precede further
"Par is clearly unachievable as there obviously has to be
another write-down for Greece to be sustainable. Fair value is
therefore pretty hard to calculate," said one hedge fund
manager, who held Greek-law bonds bailed into the PSI.
"We might easily be sellers simply in order to tidy up our
portfolios. Fifteen lines of Greek bonds is a bit distracting,"
A spokesman at FMS confirmed that the institution retained
Greek bonds with a nominal value of EUR2.6bn, but declined to
say whether it would accept the buyback.
"We would not disclose our strategy in advance," he said.
The 16 foreign-law bonds with a face value of EUR6.4bn on
which Greece was unable to enforce a retroactive collective
action clause, and that were therefore not included in March's
exchange, may also be eligible for the buyback. Several mature
over the next few years and trade nearer par.
(Reporting by Alex Chambers; editing by Matthew Davies)