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On the sad algebra of the Greek Debt Buyback

Monday, December 10, 2012 22:20
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Be prepared for the next great transfer of wealth. Buy physical silver and storable food.

yanisvaroufakis.eu / By Yanis Varoufakis /December 10, 2012

In a previous post, I dissected the recent Eurogroup plan to save Greece (again!). Today I single out the debt buyback operation which is a crucial aspect of that plan.

The net debt reduction that any debt buyback operation achieves is simple to compute: By spending sum S on purchasing its own bonds, at a ‘distressed’ y% of face value, the debtor (in this case the Greek government) can expect a net debt reduction equal to NDD = S times {(100-y)/y}.

The last Eurogroup decision proclaimed a target of reducing Greece’s debt by 40 billion in aggregate. Of that sum, 2 billion would be the result of a reduction in the interest rate payable on Bailout Mk2 loans and another 7 billion will come from the ECB returning to Greece the profits it is making from past purchases of Greek government bonds (in the context of the ill-fated SMP). Which means that a further 31 billion of debt reduction is placed on the shoulders of the debt buyback.

The Eurogroup also decided to set the price at which bonds would be repurchased at y=28% of face value – the price at closing on the preceding Friday. With 10 billion at its disposal, the Greek government would, at best, manage to reduce its debt by 25.7 billion, assuming that Greek banks sell all 15 billion of their holdings and, in addition, hedge funds add another 25 billion (of the 45 they hold) to the pot. We see that, even under these ideal conditions, the debt reduction program agreed at the Eurogroup would be short of 5.3 billion. Alas, the conditions are far from ideal and the benefits will be much, much thinner.

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Thanks to BrotherJohnF



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