The Greek PDMA released the final results for the Greek bonds buyback. The total principal offered was €31.9bn for which €11.29bn in EFSF 6-month Bills will be needed (compared to the originally anticipated €10bn amount) while the weighted average purchase price was 33.8%. The Annex contains a breakdown per bond series:
My initial comments:
- The purchase price achieved for every bond series is equal to the maximum price allowed in the auction. So it seems that the size of the auction allowed bondholders (which were at least 40% foreign) to achieve the best price offered.
- In the case of short-term series (2023-2025) only 40% of the principal held was offered. This percentage increased to 50% for 2026/2027 and to 55% for the longer dated series. Bondholders decided to mainly exchange long-term bonds (which would probably become illiquid anyway after the buyback) and hold on to shorter term ones which provide for push-to-par mechanics.
- Total principal write-off will be close to €20.6bn. Since each series pays €987mn till 2023 and EFSF interest will be deferred for the next 10 years, Greece will manage to avoid paying interest for €20.6bn principal completely and another €11.3bn till 2023. That’s around€ 6.5bn (for €20.6bn) and €3.5bn (for €11.3bn) for a total close to €30bn. As a result, outright debt reduction will be close to €27bn till 2023 plus another €3.5bn in deferred interest payments.
- Since domestic institutions seem to have offered almost 100% of their holdings and pension funds hold €7.9bn it will be almost impossible to enable the bond CAC’s in the future, especially since they can only be enabled for all series simultaneously and they require a 66% majority. In other words, remaining holders are now much more secure.
- Greek banks seem to be the main losers. Although they ‘ve probably calculated fair value around 21-25 (which means they ‘re making a small profit right now), they will lose on future interest payments and amortized principal. Their future outlook is much worse since they don’t have GGB profits to look into. How the Cypriot banks participated remains to be seen.
Economy View 
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12 Δεκεμβρίου, 2012 στις 18:41
Voskoulini
Excellent job mate. Just a question. What are the GGB profits you mentioned in you last comment??
12 Δεκεμβρίου, 2012 στις 18:58
kkalev
The initial fair value used for the GGB after the PSI was the market value and/or the CDS auction price. Those were close to 21. Any future payments would provide for an increase in value of the initial investment through amortization. Since the buyback was for a value much larger than 21, credit institutions (regardless of if they held the bonds in the AfS or HtM portfolio) should register short-term profits.
Since they are selling their bonds though, they cannot anticipate their holdings to increase in value as the securities get closer to maturity.
See here for a presentation on amortization accounting:
Click to access Accounting%20Principles%20for%20bonds%20Kabir%20Okunlola,%20KPMG.pdf
14 Δεκεμβρίου, 2012 στις 00:59
Mindkaiser
Points 4 & 5 are the keys to evaluate the aftermath of the debt buyback.
The inability of the Greek state to enforce a future haircut by utilizing CACs through controlled parties, could lead to serious holdout effects in the future and compromise future attempts of bringing the debt ratio down to a sustainable level.
Furthermore, as far as the Greek banking system is concerned, the NII of the Greek banks was largely impaired by the debt buyback, since the future interest cashflows were generated by the nominal values of the instruments, making their low market prices irrelevant.
There are some positive sides of the story, mainly on the funding and liquidity front, but I’m quite skeptical about the overall evaluation of the buyback scheme.
15 Δεκεμβρίου, 2012 στις 00:37
kkalev
I don’t think that the remaining GGB’s will play any important role in debt sustainability. €31bn of outstanding principal is just too low a number to matter. Furthermore, it is more or less necessary to allow these bonds to remain outstanding in order maintain liquidity for the relevant bond series and provide a yield curve source for any future return to bond markets.
I think that Greek government debt should now mostly be regarded as a perpetual bond, with only the interest rate (which is floating with a very low spread from market rates) playing a significant part. Debt sustainability will mostly be a function of the future growth rate, rather than the nominal debt outstanding.
Totally agree on the Greek banks front, they were stripped of any future profits and they ‘re basically ‘financing’ their own recapitalization by returning the spread between the initial fair value recoded on their books and the nominal value back to the sovereign.
15 Δεκεμβρίου, 2012 στις 19:13
Mindkaiser
You’re right of course to notice that the outstanding principle of the remaining GGBs is at this point irrelevant to the sustainability of the Greek public debt.
The argument on the other side was that, if the Greek state has chosen not to accept it’s debt reduction through the buyback program at this certain point in time, it could utilize the CACs on a future renegotiation with its creditors on better terms that the ones it achieved through the current deal. Opting to participate in another mini PSI deal, was forfeiting the possible benefits from a future enforced deal through CACs.
Nevertheless, my personal opinion is that you’re completely right about debt sustainability through growth. You can pull a rabbit out of a hat a certain number of times before market participants realize the trick.
As for the Greek banking system, as long as the ties to sovereign risk remain tight, we’ll witness plenty of seemingly strategic flaws to its restructuring and viability plan. The desire of the board members of the Greek banks to avoid future legal liabilities through legislative action, says it all.