By Jack Duffy

PARIS (MNI) – Eurozone plans for a potential E10 billion buyback of
Greece’s private-sector debt triggered a rally in Greek bonds Thursday
that pushed yields to their lowest levels since the PSI debt
restructuring in March.

The yield on the benchmark 10-year Greek government bond tumbled to
16.16%, down 57 basis points from Wednesday’s close. As recently as
July, the Greek 10-year had been yielding more than 27.5%.

The Greek debt buyback being mulled by the Eurogroup would likely
involve more than half of the debt now held by private investors and
could cut Greece’s debt-to-GDP ratio by 10%, analysts said.

The GGB strip – the average price of the 20 bonds issued in the PSI
debt exchange – reached a record high Thursday of around 28.4 cents on
the euro, climbing sharply after German Finance Minister Wolfgang
Schaeuble confirmed the size of the potential buyback on Wednesday. The
price is up 145% from a low of 11.6 cents reached in early June.

At current levels, traders said Greece would have to offer around
33 cents on the euro for a successful buyback. With E10 billion borrowed
from the EFSF, Greece could buy back and retire E33 billion in debt – or
slightly more than half of the $63 billion now in private hands. The net
debt reduction, factoring in the E10 billion Greece had to borrow, would
be E23 billion, or about 10% of the country’s current GDP.

“There is a very strong incentive for people to take profits at
this point,” said Gabriel Sterne, an economist at Exotix Ltd., a
London-based firm that deals in emerging or high-risk securities. “That
could allow Greece to retire debt worth 10% of its GDP.”

To be sure, a 10% reduction would be insufficient to bring Greece’s
debt to a level that the International Monetary Fund considers
sustainable. That is particularly true since Greece’s GDP is expected to
shrink by over 6% this year and more than 4% next year, complicating
efforts to reduce the country’s debt-to-GDP ratio.

Currently, that ratio is expected to peak at over 190% of GDP in
2014 and fall to around 144% in 2020 – well above the 120% level in 2020
that the IMF is seeking. But the debt reduction achieved through a
buyback could be enough to meet IMF demands that Greece’s debt be
fundamentally restructured, analysts said.

“This kind of soft restructuring might be enough for the IMF to
keep doling out the cash,” said Padhraic Garvey, global head of
developed markets debt strategy at ING Group in Amsterdam.

Germany has continued to reject calls by the IMF for Eurozone
governments to forgive or write-down the value of some of the E53
billion in bilateral loans they have made to Greece. It is also said to
have rejected suggestions by some governments to reduce rates on the
Greek loans to below Germany’s cost of funds.

The buyback is thus seen as the one debt-reduction measure that has
broad support and likely to be confirmed at Monday’s Eurogroup meeting.
One potential stumbling block to the deal, however, is that if market
prices keep rising, Greece will have to offer a higher buyback price,
potentially lessening the amount of debt that can be retired.

“For a deal like this to get done you have to offer something,
perhaps 5%, on top of where the market is,” said Garvey of ING. Most
such buyback deals, he said, tend to get done at around 35% to 40% of
par.

Another potential obstacle is the possible resistance of private
creditors. Officials at the Institute of International Finance, which
negotiated the private sector debt restructuring conducted in March,
have said a debt buyback could hurt the Eurozone’s credibility because
it would go against promises that the March restructuring was unique and
not to be repeated.

–Paris newsroom, +33142715540; jduffy@marketnews.com

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