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Victoria Mindova

A day before the expiration of the deadline by which investors must submit their offers for participation in the buyback of Greek government bonds, the Union of Greek Banks met again behind closed doors with Finance Minister Yiannis Stournaras. After the debt haircut at the beginning of the year, the Greek financial institutions have to go once again through a debt restructuring, which continues to drain their thin balance sheets.

Greek bankers left the meeting with Stournaras silently and declined to comment to the media on their involvement in the debt buyback. The management boards of all major Greek banks will officially announce their decision of whether they will take part in the bond buyback on Friday afternoon. Their involvement is almost certain because the payment of the next aid tranche from Europe and the International Monetary Fund depends on the success of the process. The aid includes the money for the bank recapitalization too, which ironically would not be needed if Greece had not resorted to debt restructuring.

At an average buyback price of 35 cents per euro debt, banks are expected to lose approximately 20 billion euro. They will have to receive almost the same amount from the European aid programme by the middle of December. At the same time, Greece is borrowing another 10 billion euro from the European Financial Stability Facility (EFSF) in order to be able to buy back part of its debt held by private investors.

Previous debt buyback experience shows that the market prices of the bonds that are subject to the buyback begin to increase dramatically after the announcement of the process. As in the Greek case, the increasing investor interest in fast profits from previously devaluated securities may seriously align the market prices and the buyback price offered by the government. Then, the government buyback programme may not reach the targets set for reducing the debt burden.

Foreign investors who bought bonds at their lowest prices in the middle of the year will gain profits from the process of exchange, but local players, which are banks in this case, will lose. If the market prices of the bonds reach or surpass the levels of the public offer, Greek banks will suffer serious losses, unlike foreign investors and hedge funds. The Finance Minister Yiannis Stournaras determines the success of the process and its support by local financial institutions as a "patriotic duty" and does not leave much room for manoeuvring.

International and local financial experts agree that even if the Greek buyback succeeds, the country's debt will not decrease significantly in the medium or in the long term. A positive effect of the process is considered the truce between Europe and the International Monetary Fund on the amount of the debt. The two sides reached consensus on 124% of GDP in 2020 instead of 144% of GDP which it was expected to reach with no further actions. However, these levels remain reasonable on paper, but they will not convince the markets that Greece's debt is sustainable.

Meanwhile, the conclusions made in the analysis of the financial crisis in Latin America in "The buyback boondoggle" by Kenneth Rogoff and Jeremy Bulow (1988) received a new response with the approaching of the end of the process of the Greek government bonds buyback.

A number of financial analysts, including Nouriel Roubini, agree that the Greek buyback is a waste of official money and will not contribute to the sustainability of the external debt of the Mediterranean country in the medium and long term. Furthermore, the bond buyback is implemented with funds from the official sector, which will inevitably lead to losses for Europe in the future.

Bank experts from the Institute of International Finance also agree that the buyback of the debt of Greece can be a double-edged sword. The view of the Institute, which has been spread on social networks, reads: "Greek debt buyback raises fears of more European debt subordination." In other words, it is just the opposite - the Greek buyback reinforces the fears that after reducing the role of private investors, the debt of the country will become the sole responsibility of Europe.