Greece Kills Bond Buyback Proposal

Submitted by Tyler Durden on 10/23/2012 17:23 -0400

• Bond
 
• Creditors
 
• default
 
• Fresh Start
 
• Greece
 
• Rating Agencies

One of the zanier proposals floated in the past few weeks, yet sufficient to send Greek bonds soaring to post-restructuring highs on hopes of a take out, was the suggestion that Greece would repurchase its fresh-start bonds in the open market, which recently traded in the teens, and have since virtually doubled, at a price ~25 cents of par. Obviously since the price of the bonds had been much lower, even the mere possibility of what is termed in the industry as a distressed buyback, sent everyone scurrying to purchase the paper, as if it had any intrinsic economic value (it did not), instead of mere hopes that Greece would throw even more good money after bad (especially since the fresh start bonds have a meaningless cash coupon and nobody expects them to be repaid at maturity). There is also the detail that a distressed buyback is, for the rating agencies, equivalent to an Event of Default, but knowledge of that small fact would be demanding too much out of those who scrambled in the latest chase for yield. Anyway, with all that said, it now appears that the whole idea is over, with Greek Kathimerini reporting moments ago that Greece has scuttled the proposal for a bond buyback.

From Kathimerini:

The Finance Ministry is ditching banks’ plan for a bond swap that would have eased their recapitalization requirements.

According to sources, Minister Yannis Stournaras has rejected the proposal that local banks presented to him, suggesting that this would be a move that would benefit bank shareholders disproportionately. Ministry sources added that such a move would generate accusations about favorable treatment of banks in comparison with other holders of Greek bonds.

That is also the view by the troika – i.e. the representatives of Greece’s creditors – who had earlier rejected a similar plan.

Nowadays domestic lenders have in their portfolios bonds issued after the March 2012 bond exchange, known through the acronym PSI (Private Sector Involvement), which have a nominal value of 14 billion euros but are traded at 35 basis points, which means their current value stands at 4.5 billion euros. Due to this difference, banks are burdened by accounting losses of 9 billion euros, which a bond swap would practically erase as the new bonds would have been closer to the nominal value of the existing ones.

So much for Greylock and their deja vu as of last week comment of the "slam dunk" trade of the year.

At least there is some hope left: those who followed this development closely and were as amused as us by the inherent stupidity involved, and traded accordingly, are about to make money on an otherwise very insolvent country one more time.