The buyback of Greek debt, part of the nation’s second bailout, should be broad-based and occur at the same time as a bond swap now being negotiated, according to a European Union planning document.
The document, which wasn’t intended for release to the markets, says the operation would be open to all investors and include all of Greece’s outstanding government bonds. It also recommends making the buyback conditional on the debt swap, in order to minimize the amount of time that rating companies consider Greece to be in “selective default.”
Greece could buy back its debt through a modified Dutch auction using short-term discount bills issued by the European Financial Stability Facility. The document, dated Sept. 19 and obtained by Bloomberg News, envisions the EFSF as the only source of funding for the buyback operation.
“If the offer is for EFSF short-term paper rather than cash, each bidder will make its own decision how to value the EFSF bills,” the document says. “Bidding will simply be made by reference to the principle amount of bills each bidder requires in exchange for 100 euros” of Greek bonds.
The buyback, which EU and banking industry officials estimate at 20 billion euros ($27 billion), is part of a rescue package agreed upon by EU leaders on July 21, which includes 109 billion euros in public funds and the voluntary debt swap for bondholders. The buyback is likely to offer more overall debt reduction for Greece than the accompanying bond swap, the internal EU document said.
Standard & Poor’s has indicated that a conditional buyback offer “will postpone a determination” that Greece is in temporary default until the debt swap closes, the document said. Without this condition, Greece would be placed in selective default as soon as the buyback offer is announced.
Greece would have the ability to set a minimum price and decide how to set the final clearing price for the auction. Modified Dutch auctions are used in many countries, including the U.S., for selling and buying back debt because they offer flexibility in gauging demand and pricing.
“The principal objectives of the buyback are to reduce the stock of Greece’s outstanding debt to the greatest extent possible at the lowest possible price and to help reduce Greece’s debt-service burden to sustainable levels,” the document says.
By giving the buyback a broad scope, it will be available to bondholders who aren’t eligible for the debt swap, according to the document.
“The buyback offer should be addressed to all holders of eligible debt, including retail holders,” the document said. “The Hellenic Republic and its advisers believe that the buyback should encompass all Greek government bonds and not be limited to bonds maturing after 2020 or some other date.”
The debt swap and buyback were developed in coordination with the Institute of International Finance, a Washington-based trade group whose members include more than 450 financial institutions around the world. The effort, considered voluntary, is aiming for a 90 percent take-up rate of eligible bonds.