Greek FinMin: Debt buyback program must work

AP News
Posted: Nov 28, 2012 11:15 AM
Greek FinMin: Debt buyback program must work

ATHENS, Greece (AP) — Greece's plan to buy back some of its bonds from private investors "must succeed" as it is a vital part of efforts to reduce the country's excessive debt, Finance Minister Yannis Stournaras said Wednesday.

The bond buyback is part of measures agreed in Brussels this week that included the release of €44 billion ($57 billion) in critical rescue loans from the International Monetary Fund and the other 16 European Union countries that use the euro. The bulk of those funds are to be released by December 13, with more than €10 billion to go to internal financing.

Stournaras did not give details of the buyback scheme, which he said will be funded by about €13 billion-€14 billion, which will not come out of the €44 billion bailout installment.

"The buyback must succeed, because it contributes significantly to reducing the debt," Stournaras said.

He stressed that bondholders would not be forced into the scheme.

"We have been asking for a buyback for months, it will happen, it will be voluntary and nobody will be forced to take part. Everybody can take part if they want to, I believe it is an opportunity, at the prices involved."

Greece's debt management agency is expected to give further details of the scheme early next week.

While stressing that the program must work, the minister also said there "is a Plan B," for which he would not give details.

Facing a mountain of debt and a gaping budget deficit, Greece's economy has been under close supervision since May 2010 by the IMF and eurozone countries, which have extended €240 billion in bailout funds to the country to prevent it from a messy default.

In March this this year, Greece carried out a bond swap under which it traded its bonds held by private investors for new ones with lower values and longer maturity dates. That deal wiped €110 billion off of the country's debt, with investors losing well over half the initial value of the bonds they held.

Private bondholders involved in that scheme included Greek pension and social security funds, who lost significant parts of their savings.

Many analysts have cautioned that debt buyback plan will not be effective enough to get Greece's debt under control, and that another debt write-off is probably necessary. But that option would be unpalatable for other European countries, already struggling to explain to their taxpayers why they would need to fund Greece further.

"The ill-advised bond buy-back scheme highlights just how desperate eurozone governments are to avoid an outright write-down on their loans to Greece," said Martin Koehring of the Economist Intelligence Unit. "Eurozone leaders probably know that a writedown may be the only way to really bring Greek public debt on a sustainable path in the medium term. But a write-down is politically toxic in creditor countries, at least in the short term; especially in Germany, where a general election will take place in September next year."

Greece's international bailout program seeks to reform Greece's economy to the point where it can once again independently raise money on the debt markets. The measures being implemented, which include repeated rounds of salary and pension cuts and tax hikes, aim to reduce the country's debt levels, which are expected to reach 190 percent of Gross Domestic Product next year — some €346 billion.

Current forecasts have Greece's debt level at 144 percent of its output by 2020. The IMF had originally said it would only agree to the bailout program if the country's debt was at 120 percent by then. A compromise between the IMF and the eurozone ministers was reached early Tuesday where Greece will now have to reach a 124 percent debt load by 2020 and below 110 percent by 2022. The difference between the current forecast and the new 2020 target would involve a cut in Greece's debt load of some €40 billion.

The 2022 target "looks unachievable without a further major debt restructuring sometime after the German election," regardless of whether the debt buyback works, Koehring said.