As part of the bailout agreement between Greece and the Troika, the Greek government has agreed to reduce its debt. This is the context behind the latest Greek buyback program, where the Greek government is looking to reduce EUR20 billion worth of debt. While I typically like debt reduction exercise by the public sector, I am unsure how this particular effort at this particular moment is ideal.

The main issue I have with the program is that Greece has no cash of its own. At least they do not have enough. On top of that, the government suffers from primary deficit and that means the government is unable to finance its operations. So, it is dependent on bailout money, provided by the reluctant Troika which includes European governments, which includes even the more reluctant Germany, the country that is really footing in the afterparty clean-up bill.

So, that is a bailout financed by public money of a different country.

The problem here is that the money will be used to buy back debt from private creditors. As you can see, it is a transfer of wealth from public coffers to private individuals and firms. There is something repulsive in doing so.

The factor that may mitigate that sentiment is that a majority of those private shareholders are Greek banks. In some sense, a large chunk of the bailout money used in the buyback program will help strengthen Greek banks and indirectly, the Greek economy. A majority of holders of Greek sovereign debts, apart from the Greek banks, are European of origin. So I suppose the buyback does help stabilize the European market too.

Anyway, while these private bondholders suffered a large haircut recently, the buyback program will mean that these holders will book in some profits according to the Wall Street Journal.[1]

Another factor is that because the offer is slightly above market price of those debts, the price of Greek sovereign debt has increased and that reduces its yield. In other words, that allows for cheaper financing for Greek government. But I do not think anybody will be crazy enough to buy Greek sovereign debt any time soon.

Regardless the mitigating factors, I prefer one thing more than the buyback: more debt haircut but this time on the public side.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — Greece’s debt agency launched a multibillion-euro offer to retire roughly half the debt the country owes to private creditors, part of the latest effort to trim a towering debt burden. Bond markets reacted positively after Greece signaled it would pay a slight premium to buy back that debt, but the higher price and the limited size of the offer raise questions about whether the country will be able to cut its debt as much as its European and international creditors hope. [Alkman Granitsas. Neelabh Chaturvedi. The Wall Street Journal. Greece offers to buy back debt. December 4 2012]

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