Published December 12, 2012
BERLIN/ATHENS – Greece's foreign lenders hailed a bond buyback as a success even though it narrowly fell short of a target to cut the country's debt, paving the way for Athens to get long-delayed aid to avoid bankruptcy.
The scheme was intended to put Greece's debt mountain on a more sustainable footing but is now expected to cut it by less than initially hoped because of higher-than-expected prices to buy back the bonds.
To make up the shortfall, Athens asked its foreign lenders for an extra 1.29 billion euros over the 10 billion euros initially allotted to buy back all the 31.9 billion in bonds tendered in the scheme.
Greece's major lenders -- EU paymaster Germany and the International Monetary Fund -- both endorsed the result, signalling Athens was on its way to getting over 34 billion euros in aid this month to recapitalise its struggling banks.
In a letter to lawmakers obtained by Reuters, Germany's finance ministry recommended paying out the next tranche of aid to Athens, saying the bond scheme had ensured Greek debt was sustainable.
"Overall the buyback can be called a success," said the letter, adding that "the other conditions for the payment of further financial help for Greece have been met".
Earlier, IMF director Christine Lagarde said that she too was satisfied with the outcome.
"I can only welcome the results that have been produced by the debt buyback," she said late on Tuesday after Greece confidentially revealed the results to lenders.
The programme accounts for about half of a broader debt relief package that lenders agreed for Athens last month, and its success had been seen as essential to keeping the IMF committed to a rescue plan mounted jointly with the EU.
The scheme was originally expected to cut Greek debt by 11 percentage points of gross domestic product, but the German letter showed it would only cut debt by 9.5 points.
That in turn meant Greek debt would fall to only 128 percent of GDP in 2020, four points higher than the 124 percent the euro zone and the IMF accepted as a manageable level.
In the letter, Berlin said debt could still fall to the required 124 percent level by reducing the interest Greece pays on its rescue loans or via a new buyback for bondholders who refused to take part in a debt restructuring earlier this year.
A study prepared for euro zone finance ministers in late November said such a buyback would cut Greece's debt by 0.5 percentage points of GDP in 2020 and 2022, assuming 1 billion euros was spent to buy back bonds at 50 percent of face value.
Such a buyback would not require significant additional financing for Athens, the study concluded.
NO BIG FUSS
Euro zone finance ministers and Lagarde are to discuss the way forward at a Eurogroup meeting on Thursday that will make a final decision on releasing aid to Athens. In addition to Germany, Finland suggested that aid would be disbursed.
"I consider it likely that we can reach an agreement on paying the next loan tranche in the meeting tomorrow," said Finance Minister Jutta Urpilainen of Finland, one of the sharpest critics of Greek reform efforts.
Analysts also felt euro zone finance ministers would be able to tie up the loose ends, removing the threat of a Greek bankruptcy and a euro zone exit that has hung over financial markets and the bloc for months.
"There was a lot of scepticism a few weeks ago that they would manage to do this at all. I don't think anyone will want to raise a big fuss, they will find a way to disburse the aid," said Sassan Ghahramani, CEO at New York-based SGH Macro Advisors, a hedge fund consultancy.
The buyback has had to jump several hurdles before Greece's lenders could proclaim its viability.
Athens had to extend the deadline to Tuesday after falling short of an initial 30 billion euro target for bonds offered, and then had to rely on its own cash-strapped banks to push it above that threshold.
Greek banks are estimated to have contributed almost all their bond holdings to make sure the plan worked, and may incur about 2 billion euros in losses from their participation, Greek central bank chief George Provopoulos told lawmakers, citing bankers' own estimates. He did not provide further details.
Greek banks are in talks with the finance ministry to recoup some of the losses through deferred taxation, Provopoulos said.
The bulk of the remaining offers is estimated to have come from hedge funds that purchased the bonds over the past months at rock-bottom prices, allowing them to make a tidy profit.
Greece will pay an average price of about 33.8 percent of face value on all series of bonds, the debt agency said -- above estimates given at the time the scheme was agreed last month.