Another sad verdict, surrounded by much merriment.
Greek authorities have announced that the Dutch auction has produced offers of 31.9 billion worth of (post-PSI) Greek government bonds at an averaged price of 33.8% of face value. The same sources reveal that the Greek banks were strong-armed into offering all their holdings (against their better judgment), a total of around 17 billion. Which means that hedge funds and other privateers chipped in another 14 billion approximately. At this high price, the Greek government cannot afford to accept all the offered bonds, as it has only 10 billion to spend.
Thus, unless it borrows more from the EFSF, it will accept around 29.5 billion of the offered bonds and will, thus, achieve a net debt reduction of around 19.5 billion. The Greek media, as is their wont, are celebrating the success of the buyback (just as they were celebrating the successful PSI last February and all the loans that Greece received in the past three years). Is there a foundation for these celebrations? None whatsoever, I say. Here is why:
In effect, what has happened is that the Greek state, in order to receive around 24 billion in loan tranches on behalf of the Greek banks (24 billions that will be pumped into the Greek banks as part of the pre-agreed recapitalisation), has effectively imposed upon them a savage two-pronged haircut in the order of, give or take (and depending on present value calculations),16 billion euros! How come? Here is how: Government bonds with a face value of approximately 17 billion were swapped for EFSF bonds worth 5.8 billion. Moreover, having been forced to hand over their total holding of Greek government bonds effectively kissed away around 5 billion of expected coupon (or interest) payments. All up, approximately 16 billion.
Pro-buyback commentators dismiss the above claim by arguing that Greek banks were already marking these bonds down to 22% of face value and, therefore, the buyback operation left them better off. This is absurd. First, whether these losses had been factored in the banks’ recapitalisation needs is irrelevant to the plain fact that their holdings of Greek government debt were savagely haircut. A haircut is a haircut regardless of whether you have accounted for it. Moreover, for the purpose of Basle III and EBA audits, the banks continued to count 100% of these bonds as part of their tier 1 capital. Proof of this is that Greece’s banks have been, until now, posting these bonds with the European System of Central Banks (via the Greek ELA) as collateral, receiving liquidity at 70% of face value. This liquidity has now been lost to them too; a loss of more than 5 billion of liquid money for a banking sector that is utterly unable to support the circuits of credit in the imploding Greek social economy.
So, the only argument that can be made, to the effect that the losses had been factored in already, is that their recapitalisation needs (to be covered by the EFSF) had taken into consideration a major haircut. You may believe this if you want but it would take a heroic disposition to do so. Take for instance Spain’s banks. We all know, it is common knowledge, that their black holes are much, much higher than the 40 billion that the EU has just pumped into them.
Similarly with the Greek banks. Their capital needs have been grossly underestimated independently of whether their holdings of Greek government bonds were marked to market or not. With this debt buyback they have lost all potential gains from a future recovery of their government bonds, all the anticipated interest-coupon payments, plus their day-to-day liquidity mentioned above. When the recapitalisation takes place, courtesy of the Greek taxpayer who will be borrowing from the European taxpayer (via the EFSF) on the banks’ behalf, these newly borrowed funds will disappear with certainty into the Greek banks’ gargantuan black hole (as bankers, eager to retain their control over their banks, will hoard every penny).
Summary
The Greek state was forced to haircut the Greek banks to the tune of anything up to 16 billion, in present value terms, in order to get its hands on 24 billion of EFSF loans that it will hand over to the same banks.
The haircut was necessary to pacify the IMF’s (understandable) penchant for debt-reduction (Greek government debt will be cut by a little less than 20 billion) but it will, tragically, ensure that the 24 billion that the Greek government is about to borrow from the EFSF to give to the banks will disappear without a trace (from the perspective of the Greek macroeconomy).
So, all in all, the state’s debt will have risen, in net terms, by between 4 and 5 billion (24 billion new debt on behalf of the banks minus the 19.5 billion of net debt reduction, following the buyback) while the nation’s banking system will remain zombified ad infinitum.
And yet, this absurdity will be celebrated as a successful sovereign debt reduction and a promising bank recapitalisation. When, in the next 6 or 12 months, Greece will be, once again in the headlines, with talk of a new ‘program failure’, you will know why!