That morning after feeling again (when the buy-back scheme proves ever so unattractive in the day's unforgiving light)

The rumour of a buy back of the Greek debt began with an email sent by German daily Die Zeit. My last post explained why this idea ought to be treated with contempt. Soon after, Die Zeit  Online featured an article by Mark Schieritz that makes the same point. Here is a summary of his argument:

The idea was that the EFSF lends Greece  sufficient money, and at a reasonably low interest loan, for the purposes of buying its own bonds in the secondary market. The attraction of the idea rests on the observation that these bonds are currently trading at 70% of face value. But, if the EFSF loan is sufficiently large to allow Greece to make this purchase, it will constitute a significant net wealth transfer from the eurozone (on whose behalf the EFSF borrows) to Greece. By itself, such a transfer would improve Greece’s image in the bond market, it would boost demand for its bonds and, thus, their the price will rise. In the limit, as Greece’s debt burden diminishes, they would start trading at face value again. We might as well have the eurozone or the ECB buy up all Greek bonds forthwith, without the shenanigans involving the toxic eurobonds pawned currently to the global financial makrets by the ECB.

Economists (despite our otherwise legendary incompetence) understand the reflexivity involved in interventions whose purpose it is to use the market for the purposes of public policy. When it comes to debt reduction, all the best laid plans will lay in ruins if they are confined to the use of market operations. What is necessary here is a political intervention by which part of the debt will be written off and another part will be re-synthesised using the ECB’s capacity to reduce interest rates on behalf of the eurozone periphery. (Permit me to insist, once more, on peddling the Modest Proposal as a simple three-step plan for accomplihsing this.) Germany may not like the idea but if it is serious about a debt reduction plan for countries like Greece, it has no viable alternative.


  • Could you please interpret the voluntary move of Vienna Ins Group?

    Without any finally formulated proposal on behalf of Brussels (of Frankfurt), which is the implied interest for this haircut?

    • If I may intervene: they (Vienna Insurance) know that the bonds will be subjected to a haircut sooner or later, and prefer to write down the losses now — where probably some other good news will swallow them or because they have sufficient profit — than leave it for later. It might come at an unexpected and unwanted time…

    • I concur with Jerry. The difference between the Vienna Ins Group and most banks is that the former can afford to register the haircut on their books at this juncture. Most banks cannot do so without risking a backlash…

  • It would work if Greece borrowed the money at say, 2 12% and then tendered for its outstanding bonds at 60-70% of face value with the stipulation that bonds not tendered after a certain date would either not be paid of subject to further penalties on maturity.This is a violent default, when a negotiated one would be very much more preferable.

    • Only problem is, Jerry, that the bonds held by the ECB and by the large eurozone banks would not be offered to the Greek government under this tendering scheme. Neither the ECB nor the banks are willing to register the 30%-40% haircut on their books – as they would have to if they sold the bonds back to the Greek state. And since they hold more than 80% of Greece’s bonds, the net effect of such a buy-back scheme on the outstanding Greek debt would be minimal.

  • Reconsidering that, Solvency II (Basel II for Ins companies) came in my mind.

    Actually, insurance companies have to diminish the exposure to doubtful debts and capital to fufil its requirements.

    So, they may have the opportunity to “sanitize” their portfolio.

  • Is it correct to assume that the EFSF would “lend Greece sufficient money, and at a reasonably low interest loan”? Aren’t they borrowing at 2.75% and lending to Ireland at 6%?

    Also, portfolio managers seem to prefer eurobonds over individual eurozone sovereign bonds ( Are German policy makers okay with this? I assume that the preference for eurobonds will only increase and preference for sovereigns (including bunds) will only decrease as long as the entire eurozone situation remains uncertain.

    • My point therefore was that, even if Greece is lent at very low rates, the problem will not go away: the price of bonds will rise and teh buy-back will be futile. Now, on your point about the Irish paying through the nose for their EFSF loans, you are more than right. Indeed, this is the travesty of it all. The EFSF lends to Ireland at an enormous spread. However, it is not doing this out of usurious instincts but only because it is forced, by its very design, to issue whay I call toxic eurobonds; eurobonds containing slices of debt taken out by different member states, and thus reflecting different interest rates and credit risks (see this post The result is that it must borrow a great deal more, by means of these toxic eurobonds, than it lends Ireland. And poor Ireland is charged an interest rate reflecting the total amount borrowed on its behalf (even if it receives a little more than half of that in the form of actual loans).

      The fact, as you mention, that demand for these eurobonds is brisk is testimony to the investors’ hunger for European, common debt. And why is this? Because their alternative is low yield US Treasuries or even lower yield Japanese bonds (excluding riskier paper from elsewhere). If these awful contraptions are in such demand, imagine what would happen if the ECB were to issue its own bonds – backed only by itself. They would sell like hot cakes. As for Germany, it has nothing to worry about. Its only bunds do not lose out when eurobonds (toxic or benign) do well. This is not a zero sum game. In fact, I think the opposite holds: If the ECBC were to issue bonds on behalf of the eurozone’s periphery, German bonds would do better too as investors’ nerves would be settled (on expectations that Germany would no longer have to borrow to support the EFSF which, in turn, supports so inefficiently, the periphery).

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