ATHENS Greece said it would spend 10 billion euros to buy back bonds at a price range that topped market expectations, boosting hopes it can cut its ballooning debt and unlock long-delayed aid.
A successful 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 would clear the way for the funding Athens needs to avoid running out of cash.
Hopes the deal would attract enough investor interest to cut debt by the targeted 20 billion euros - about 11 percent of gross domestic product rose after the government offered a premium to market prices, sparking a rally in Greek bonds.
"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 in which investors declare what level they are willing to sell their bonds at before Athens sets a final price.
Such an auction creates competition among investors since anyone bidding at the upper end of the range risks being left out, and allows Athens to assess demand before setting a price.
The range set by Athens varied from a minimum of 30.2 to 38.1 percent and a maximum of 32.2 to 40.1 percent of the principal amount, depending on the bond maturities of the 20 series of outstanding bonds.
That reflected 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 euros, 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 December 7 and the expected settlement date is December 17.
Athens has not announced the value of bonds it hopes to buy back, but euro zone officials have said the bloc hoped it could repurchase at least 40 billion euros of its own bonds.
Greek government bond prices rallied on the news. Shares of Greek banks - which fell when the buyback was announced last week on fears they would have to book losses if they took part - surged 6 percent on Monday.
Despite the better than-expected terms, some analysts said it remained to be seen whether the buyback would be successful. Greek banks - which hold about 17 billion euros of eligible bonds - are under pressure from Athens to participate, but there is skepticism over how many foreign investors will do so.
"This is just another milepost on Greece's road to Hell, which is of course, paved with good intentions," said Stuart Thomson, manager of the Ignis Strategic Bond fund.
"The success of this buyback depends on the hedge funds and very much on their calculation whether a holdout could eventually get them more, or whether they will face a haircut in the next round."
RBS strategists said they expected the buyback to be a success given many funds would book a profit after picking up the bonds in the range of 15-20 cents on the euro.
The bond buyback is part of a broader debt relief package agreed by Greece's euro zone and International Monetary Fund lenders last week. The package could help the country's recession-hit economy to start recovering faster than expected, Greece's central bank said on Monday.
Still, 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 percent in 2014 - to 124 percent of gross domestic product by 2020 and there is a growing sense the only way to get there is to write off loans.
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.
"Even including the buyback, the debt arithmetic will prove to be relentless as long as Greece is stuck in its debt trap," said Wouter Sturkenboom, market strategist at Russell Investments, global asset manager with more than $150 billion under management.
(Additional reporting by Renee Maltezou in Athens and Sinead Cruise in London; Writing by Deepa Babington, editing by Mike Peacock and Anna Willard)