It's a fab time for a Greek buyback, says Goldman

Discussion in 'Wall St. News' started by ASusilovic, Jun 16, 2011.

  1. Amid the steaming wreckage of the Greek bailout on Thursday — a little Goldman hopefulness on what to do next. Not a rollover. Not a restructuring, technically.

    A ‘managed deleveraging’.

    Actually what the bank’s analyst, Francesco Garzarelli, is proposing looks like a curious hybrid of bond buyback and one-off fiscal transfer. They’re ideas that had been absolutely central to the Greece debate merely months ago, but were rapidly overtaken as the country’s finances continued to implode and bailout fatigue in the northern eurozone multiplied.

    Garzarelli is resurrecting them again because official exposure to Greece is rising and rising as time goes on, which is making the amount that eurozone taxpayers would lose in a default bigger and bigger. (Note that Garzarelli is including European Central Bank holdings of private debt as official exposure). As Garzarelli argues:

    If this is the ‘end game’, we continue to believe that secondary market purchases of Greek debt by a joint European vehicle (a policy option that has been rejected in March, but could be dusted off) would achieve several objectives, particularly now that Greek bonds trade at distressed levels (the average weighted price of those maturing between 2014 and 2015 is in the low 60s, while that of bonds maturing after 2016 is around 50c).

    First, if financial institutions were ‘voluntarily’ asked to sell bonds maturing in the next few years, this would satisfy the political demand for private-sector participation (pain would fall proportionally more on those institutions that have provisioned less for losses). Second, the money saved relative to a notional-for-notional replacement of bonds with loans could be used to recapitalize the Greek banks, and offer the European taxpayer some buffer in the event of a ‘haircut’ down the line. And third, if the purchases involved the portfolio held by the ECB, this would enhance the credit quality of the balance sheet of the central bank.

    The idea is that official exposure would ‘organically’ deleverage over time.

    Anyone see the problems here?

    Europe tried to prop up Greece’s bond prices for months, via the ECB’s Securities Markets Programme, making a buyback uneconomical. It’s all been for nothing, except perhaps some borrowed time. Perhaps this is ironic rather than problematic, however.

    The real problems are that a) the figleaf of ‘volunteering’ in the plan would be toast before the rating agencies (perhaps that’s only a problem in the minds of the ECB) and b) the fiscal transfer issue isn’t solved. It’s only shifted around or assigned to conceivably more useful purposes, like bank recapitalisation. Still a massive risk however.

    There’s also the small issue of Greek domestic politics being the sole driver of any actual solution to the debt crisis at this point…