Monday, 10 December 2012

Buy bites Back

The deadline for the buyback of the Greek post-PSI bonds ended at 7pm on Friday and we should have known the results by now. After all, a succession of “Greek officials” appeared jubilant about the level of participation in the days before. You believe this and you might as well believe that Santa drinks your beer. The Greek officials tried to ramp up the buyback. Was this engineered enthusiasm the correct strategy? Clearly not. Let me explain. If you are a bond holder and you hear that the buyback is hugely successful you are more inclined to hold on to your bonds. Firstly because the success would increase the chances of Greece surviving, namely being repaid if you hold out and secondly because the available stock would be reduced making these bonds slightly more precious in a good scenario. In other words, the best strategy for the Greek side was to keep their lips sealed and refrain from the usual Mediterranean exuberance.

According to press reports Greece is already considering reopening the offer as the magic figure of 30billion has not been achieved. This represents half of the outstanding stock. Apparently they are close to 26billion, 4billion short of the one demanded by the IMF and Eurogroup in order to release the 31billion+13.5billion. So Greece has two options

- Either talk to the IMF to find out if it is ok to proceed with the 26 or     - It needs to reopen the offer.

Let me first say that the installment is not in danger. Greece one way or another would get the money. The difference is too small to endanger the decisions taken. What is though interesting is the strategy and games that bondholders played in this buyback offer.

Greek banks held close to 20billion of bonds were the unwilling participants. A gentle reminder by the Greek FM Mr Stournaras to do their “patriotic duty” together with the promise to shield the directors of the banks from any potential lawsuit by disgruntled shareholders probably did the trick. However, it seems that Greek banks only placed 10billion (mostly long dated) in the pot waiting to see what the non-Greek institution will do. Also according to press reports German banks refrained from participating. If this is true then a gentle reminder by Mr Schäuble to the state controlled German banks to do their patriotic duty will do the trick. Similarly for the Greek banks.

No-one really had an incentive to sell back his holdings if those bonds came straight out of the PSI. Only those that entered the market after the PSI and at prices close to 15-20% had an incentive to sell for a quick profit. But even these might hold on if they saw that the process was successful.  In other words the sword fell one more time to the Greek banks.

What is also interesting is that we have entered a new era of bond market. What is important is not what you own and the credit quality of the assets you own but who you are and what is your legal jurisdiction. If for example you are a Spanish bank owning Spanish debt you are no longer free to handle your portfolio. The regulator/government has a veto over your portfolio. Therefore it is better to be based in some pacific islands and to buy non-domestic law Government bonds than being an onshore fund/bank owning government bonds of the same jurisdiction.