Greek bond buyback

Paul Krugman's link (and old paper) reminded me I had wanted to cover this idea:

Analysts said on Wednesday that having Greece buy back its own devalued bonds could be an important step toward solving Europe’s sovereign debt crisis.

It's an interesting equilibrium.  Let's say Greek bonds are selling for 60 cents on the dollar.  If the Greek government offers sixty-one cents, arguably the government is signaling a more optimistic prognosis than a 60 cent value or even a 61 cent value for the bond.  Don't sell ("beware of Greeks bearing gifts!").  If everyone is a rational Bayesian, the price of bonds should go up to the point where the Greek government doesn't want to buy the bonds any more or where indifference holds.

If buying back some of the bonds makes the rest of the debt easier to pay back, all the more reason not to sell your bonds at the initial offer price.

The purchase might work if the Greek government can signal they don't have inside information about their own ability or willingness to pay back the money.  That's hard to do, but not impossible.  After all, companies do buy back their own shares and I don't think tax arbitrage is the only motive.  For instance the company also may wish to shift the composition of its creditors and perhaps governments have the same motive.  Then the purchase can be a win-win.

Another equilibrium is if the Greek government offers to buy back the bonds with some probability.  Sellers might then play a mixed strategy in response and maybe then we are getting somewhere, with some probability that is.  These games usually are complicated and if you don't already get the intuition here don't bother with it.

Overall, the schemes are unlikely to work in practice.

Comments

Um, where does Greece get the money to buy back its bonds?

Tyler, not sure what you mean here--the *major* non-tax reason for a stock buyback *is* inside info. Also, shareholders aren't (in any sense) "creditors" and the buying firm can't pick which shareholders to sell to. . . .

Secret sovereign debt buy-backs were much talked about in "Tales of an Economic Hitman"

"If everyone is a rational Bayesian, the price of bonds should go up to the point where the Greek government doesn't want to buy the bonds any more or where indifference holds."

But what about the differences between investors? I may need cash; the tax loss may look good to you; she might think the Greek government is optimistic but fool.

Didn't this actually work out for Ford Motor Company?

Trotsky has it - offering to get paid, now, by the IMF/ECB/etc has to be balanced by the Greek government defaulting in the (potentially near) future. There is no actual Greek government buyback - it is just a post office box address for the sake of appearances.

And considering that at least the ECB, in its German aspect, is quite serious about haircuts, this might be the sort of buyback offer which insiders would be willing to participate in.

Yes, the modern economy is run by Kabuki, Ponzi, and only the Pleasures of Hope.

(Businesses would not be required to accept Bonds, so they would not be "legal tender for all debts";

Tom Grey,

The above is the only new part of an old idea, but it is only new because because government invariably hate having their paper not honored by their own populace at face value.

beware Greeks bearing...it's called "shell game"

The commenter remarking on how the bond market works has a point.
The other (real world) way to look at it is that this offer is as good as it gets. If this one isn't "successful", the next offer will be 30 points lower. And some holders may be happy to get out and any (reasonable to them) price. It looks a bit like a game of chicken.

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