Greek Bond Exchange is a Bad Idea

Greece’s lenders fail again to clinch debt deal | Reuters.

Germany is hinging the current plan to get Greece’s debt under 120% on a poorly conceived bond exchange. Essentially, Germany wants Greece to borrow €10bn to buy back its own bonds at a steep discount to face value.

There are two reasons why this is a bad idea. First, Greece will eventually default anyway, so it should not buy back bonds that will never be repaid.

Second, if you do not believe that Greece will default (note that I used the word “believe” not “think”), then it is still a bad idea because the bonds have really generous terms, which Greece will never be able to replicate on further issues.

As part of the Greece’s March 2012 bailout, in exchange for €1000 of old bonds investors received 20 news bond for €15.75 in principal, maturing one per year from 2023 to 2042 paying

  • 2% through 2015
  • 3% from 2016 to 2020
  • 3.65% in 2021
  • 4.3% from 2022 through 2042

Each investor also received EFSF notes and GDP based warrants, but these will not be bought back.

The interest rates on the new bonds are lower than the rates that Italy and Spain are currently receiving. If Greece ever returns to the bond markets, it will  not be able to sell debt at these prices. No independent adviser would recommend to Greece to buy back these bonds. They are just too cheap and will not really save the country much money.

The real reason Germany is suggesting this ploy is because it will shave a paltry 2 or 3 points off Greece’s  debt to GDP ratio to cosmetically enhance it for the benefit of the IMF.

The closer the German government gets to elections, the more cynical it becomes.

If you do not think the deal could actually look worse think again. Guess who owns the majority of these bonds? Try Greek banks owned by the tax-dodging Greek elite and hedge funds.

To summarize, the Greek taxpayer is being screwed so that banks and hedge funds can make excessive profits speculating in its debts while the Germans get to avoid another Greek bailout prior to elections.

 

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