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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.
While awaiting official briefings on the agreed prices and quantities tendered (with the sound of Greece bankers’ arms being twisted by the Finance Ministry in our ears), one thing is clear: The much heralded Greek debt buyback is a tale of two worlds. It constitutes a reward to hedge funds and a ruthless domestic PSI No 2 (aka a massive involuntary haircut) for Greece’s embattled banks. Moreover, its effect will be a net debt reduction 40 per cent less than the Eurogroup’s stated target.
The bankrupt Greek state is haircutting almost €10 billion of the money it owes to Greek banks so as to be allowed by the troika to borrow €24 billion, on behalf of these same Greek banks, in order to recapitalise them and in the hope that this recapitalisation will help stimulate private sector interest in the bonds and shares of these banks so that the banks can begin lending to the Greek private sector again, thus kickstarting the Greek economy with a view to generating the taxes from which the nation’s debt to the troika can be repaid. Meanwhile, because Greece’s debt will, quite obviously, not be reduced to anything like the proclaimed (by the Eurogroup) levels, and given that the banks need much, much more than €15 billion to be properly recapitalised, no private investors will invest in Greek banks (especially as they note that they are tied to an insolvent state), the Greek banks will hoard the money that the state will have borrowed from the EFSF on their behalf (fearing that any decent EBA-ECB audit will find their capitalisation ratio extremely low, and thus declare them bankrupt) and, at the end of the day, tens of billions of fresh loan tranches will have (like all those that preceded them) authored another nasty act in the cruel theatre of horrors that is the Greek bailout.