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Greece works on debt buy-back

November 29, 2012

ATHENS, Nov 28: The Greek government got down to work on Wednesday on how to buy back part of its debt, under a new IMF-eurozone rescue package which is pushing down Greek bank shares.

The index of banks quoted on the Athens stock exchange fell by 4.12 per cent in initial trading on Wednesday, having fallen by 9.80 per cent on Tuesday. Finance Minister Yannis Stournaras was to explain how the buy-back will be carried out, at a press conference early in the afternoon, a ministry source said.

The scheme, tied to the latest rescue package for Greece, is expected to concern debt bonds issued by Greece and held by private creditors, the source said. The value of Greek bonds has plunged in value as the debt crisis has risen in intensity and since a big debt write-off by private bondholders at the beginning of the year.

By buying back debt at a heavy discount, Greece reduces the total burden of debt. Under the terms of the complex package of measures agreed in Brussels early on Monday, Greece must buy back part of its debt under certain conditions by December 13. Under the package, the IMF and the eurozone agreed to release 43.7 billion euros in four instalments from the middle of December to March to enable Greece to avoid the bankruptcy towards the end of the year.

This latest transfer is under a timetable set by previous rescues, and conditional on new budget action which Greece has agreed to enact. It was held up until the deal on Tuesday because of deep problems over how to deal with Greece’s huge long-term debt.

An important part of the package is the arrangement for Greece to buy back debt by December 13. Analysts at the Greek bank Eurobank said they expected the operation to be carried out next week and to involve the purchase at a discount of half of debt totalling 62.3bn euros held by private creditors.

In March, Greece’s overall private creditors agreed to write debt of about 107bn euros. Eurobank said that under the latest operation, the Greek state hoped to reduce the debt in private Greek hands by 17bn euros. The purpose of this is to enable Greece to reduce its outstanding debt as a ratio of gross domestic product to 124.0 per cent in 2020, as required by the latest IMF-eurozone deal which represented a compromise by the IMF.

But Greek banks, already in trouble before the 70-per cent debt write down in March which further weakened their balance sheets, are under new pressure because of the buy back. Greek economic newspapers say that Greek banks, which are in the process of being recapitalised, hold bonds covered by the buy-back proposal amounting to 16.9bn euros.

Greek social insurance funds hold qualifying to the tune of 7.9bn euros and foreign funds holds bonds worth 33.0-34.0bn euros.

The buy-back means that holders of the bonds, who have written down the value already in their balance sheets and may be hoping to hold on to the bonds in the hope that one day they recover part of their value, will no longer have this option for the instruments affected.

The effect for Greek banks will be to reduce their chances of attracting private capital to avoid falling under public control as they recapitalise, the former president of the Greek banking union Vassilis Rapanos said on Skai television late on Tuesday.—AFP