Last updated: December 3, 2012 10:24 am

Greece unveils bond buyback plan

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People walk in front of the Greek Parliament in Athens©Getty

Greece announced on Monday details of plans to spend up to €10bn to buy its own debt at a steep discount, in an important part of its effort to meet the conditions set ahead of the payment of the next tranche of financial aid for Athens.

It will swap the existing debt with six-month paper issued by the European Financial Stability Facility.

The country’s Public Debt Management Agency said the buyback would be conducted via a modified Dutch auction, whereby investors will be able to compete to get the best price within a price range. The process allows Greece to gauge the level of demand for the bonds before it sets a final price for the deal.

The PDMA has set a minimum range of 30.2 per cent to 38.1 per cent of the original maturities on a series of 20 outstanding bonds. It set the maximum percentage of the original value of the existing debt it would buy back between 32.2 per cent and 40.1 per cent.

The terms of the offer mean that the holders of the debt must reveal how big a loss on the paper they are prepared to take before the price of the buyback is set.

Following the announcement, the yield on 10-year benchmark Greek bonds fell 147 basis points to 14.69 per cent.

By offering to repurchase some of that debt officials hope to improve the country’s debt profile, helping to meet the terms of the deal agreed last week by finance ministers. Greece needs to cut its debt to 124 per cent of GDP in 2020 versus the 190 per cent it was projected to hit in 2014.

The auction, which will help efforts to meet the conditions necessary for Greece to receive the much delayed next tranche of aid, comes after private sector bondholders earlier this year agreed a €200bn restructuring of their Greek debt.

However, the current auction targets about €62bn of Greek debt that remains in the hands of Greek banks, a few investors and some hedge funds.

The terms announced should satisfy Greek banks – which last week raised objections to the debt buyback proposal – by giving them a chance to make gains on bonds held on their books at about 25-30 cents on the euro.

“The minimum price seems set to attract as much participation as possible . . . from the Athens viewpoint it looks satisfactory,” said one Greek banker.

Greece’s four largest banks together hold about €15bn of bonds. Other eurozone banks are understood to have about €4bn-€5bn of Greek paper.

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Another banker said the Greek participants would have preferred to receive cash, not European Financial Stability Facility paper, for their bonds to help reduce a prolonged liquidity squeeze, “but it’s clear the international lenders won’t come up with more direct funding”.

Private sector investors appeared pleased the eurozone authorities were being more generous than initially feared. “This is a move in the right direction. It is more sensible than the original suggestions,” said one analyst familiar with the situation.

Richard McGuire, senior fixed-income strategist at Rabobank, said the deal would be a “transitory offset” for Greece, providing only temporary relief in the absence of any real economic growth.

The offer will run until 5pm London time on December 7, with the settlement due to take place on December 17.

Joint dealer managers on the deal are Deutsche Bank and Morgan Stanley.

Reporting by Michael Hunter, Mary Watkins, Kerin Hope and Ralph Atkins

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