Greece Launches €10bn Debt Buyback as Rescue Reaches Critical Phase

Greece has unveiled terms of its crucial bond buyback programme that will unlock around €30bn in aid and possibly represent a crucial turnaround in the country's financial crisis.

The terms were made public by Greece's finance ministry before a meeting of Eurogroup finance ministers in Brussels later today that could see Athens buying back as much as €62bn in Greek government bonds from its own banks as well as international private investors. The deal will use around €10bn of the cash that was pledged by the European Union last month as part of a third recuse package for Greece that followed Prime Minister Antonis Samaras' new budget.

The buyback is will be run in the form of a so-called Dutch Auction (ie many sellers and one buyer) and is expected to run until 5pm London time on 7 December, Greek officials said Monday. The maximum price that will be paid on the various eligible bonds will be between 32.2 percent and 40.1 percent of the principal amount while the minimum will be 30.2 percent and 38.1 percent respectively. Deutsche Bank will act as the lead on the deal for the Greek finance ministry.

Greece's banks, several media reports indicate, are ready to participate in the buyback despite the fact they will need to crystalize losses on the €15bn in bonds they already hold. However, given that the success of the buyback will bring in around a third of the €44bn in total aid last month's agreement allowed by placating concerns that the International Monetary Fund has about Greece's debt sustainability, most banks are said to be ready to agree.

Reuters has said Greece could pay as little at €8.7bn to buyback around €31.5bn in government bonds if only 50 percent of the holders participate in the buyback. Taking that total to 60 percent would ultimately save Greece around €40bn in face value and future interest payments, Reuters said, basing its calculations on 23 November closing prices.

The new aid money will be used, in part, to recapitalise the same bank balance sheets that will take a hit from the bond buyback. In what many see as a move to encourage the process, Greek banks were given until 21 December to report their financial results, allowing the 13 December deadline for the buyback to close to remain intact.

German Chancellor Angela Merkel told her country's Bild newspaper over the weekend that the efforts made by Greece to both reduce its budget deficit and bring its longer-term debt pile closer to 124 percent of GDP by the year 2020 could open the door to a possible further write-down of debts held by European institutions.

"If Greece one day can rely once again on its own revenue, without having to borrow, then we'll have to look at this situation and make an evaluation," Merkel told Bild am Sonntag, adding that it would only happen in 2015, "if everything goes according to plan."

This potentially major change in policy could have massive implications for Greece's debt sustainability as many have argued that debt forgiveness - something Berlin has maintained would be both illegal and unhelpful - is effectively the only way to permanently solve its financial woes and allow the country to exit from its half-decade recession.

"Even if the buyback is a success, we think the current form of Greek program resolution without any outright haircuts on EU loans to Greece is already priced in and should not make a difference to sentiment," RBS analysts Cagdas Aksu and Vivek Shukla wrote in a client note.