Greece to Borrow up to €35 Billion for Debt Buyback




ATHENS—Greece will borrow up to €35 billion from Europe’s temporary bailout fund to finance an ambitious debt-buyback plan from the European Central Bank, according to official documents released by the government Saturday.

The 19-page bill sets out how the restructuring will be implemented and includes a plan through which Greece will buy back those bonds now held as collateral in the national central banks of euro-zone countries.

The plan is part of a raft of new measures Greece must take to secure a €130 billion bailout from its European partners and the International Monetary Fund, along with a €100 billion debt write-down the country is negotiating with its private-sector creditors.

The measures, which will be voted on in parliament Sunday, include sweeping reforms such as €1.1 billion worth of cuts in pharmaceutical costs, abolishing restrictive rules on tourist guides and opening up Greece’s energy market to foreign investment.

According to the bill, the European Financial Stability Facility, the euro zone’s transitional rescue fund, will lend Greece the money to carry out the buyback. The ECB will act as an intermediary in this transaction, buying the bonds on Greece’s behalf.

Specifically, the draft legislation says that under the “ECB Credit Enhancement Facility Agreement [there will be] provision of financial assistance, up to the total amount of €35 billion, in order to offer the Hellenic Republic the ability to finance the possible buyback of its bonds that have been offered as collateral in the euro system, with EFSF bonds.”

The euro system is the network of the 17 national central banks of countries that share the euro.

The measure, first discussed in July will be necessary because, after the bond swap that will restructure Greece’s privately held debt, the country is expected to be declared in selective default, rendering its bonds of a quality too low to be held as collateral. The bill acknowledges that this bond-buyback plan will temporarily increase Greece’s debt burden.

The EFSF is a special-purpose vehicle incorporated in Luxembourg. It is endowed with €440 billion worth of guarantees from 14 of the 17 euro-zone countries. Greece, Portugal and Ireland—the three euro-zone countries receiving bailouts—do not contribute to the EFSF.

The bill also formally states that Greece will issue €70 billion in new bonds to offer bondholders in exchange for their old bonds, which will undergo a 50% reduction in face value.

An additional €30 billion will be provided in the form of bonds issued by the EFSF and will be offered to private creditors as a “sweetener.”

The law does not offer detail on the interest rate the new bonds will carry, but it does say the yields will be linked to the country’s growth rate.

Over the next few days, Greece is also expected to unveil legislation on other aspects of the debt-swap plan, including the introduction of retroactive collective-action clauses to bind private-sector creditors who are reluctant to take losses.

The program—laid out in the legislation and more than a dozen accompanying documents—also sets new, easier budget targets for Greece as well as revised goals for its long-delayed privatization program.

According to a separate draft document, Greece will aim to raise €50 billion from privatizations over the “medium term” rather than by 2015 as it had previously committed.

But by the end of 2012, Greece should aim for €4.5 billion from privatizations, including the roughly €1.5 billion that it has raised to date. By the end of 2015, the goal is to have raised €15 billion.

The new program also eases some of the country’s budget targets. Greece is expected to post a small primary budget deficit this year, and a primary surplus of €3.6 billion in 2013. Previously, the government’s budget program called for a primary surplus to be achieved by this year.

Greece’s banks, which are facing €17 billion in losses from the debt write-down plan, will have to achieve a core Tier 1 capital ratio of 9% by the third quarter this year, and 10% by the second quarter of 2013. Previously, the banks had been told to reach that 10% threshold by August of this year.

According to the document, banks facing capital shortfalls can appeal to the Greek state for aid in recapitalizing. In exchange, the banks will have to issue the Greek state common shares, or in some cases, contingent convertible bonds.

But bowing to fears about state control of the banks, the document says the state will hold only restricted voting rights that can be exercised in only “specific strategic decisions” depending on how much aid the banks need.

“The Government will ensure that Greek banks have business autonomy both de jure and de facto,” according to the document. Further details of the recapitalization scheme will be defined in separate legislation.