Will the Greek Buyback Be a Success?

After failing to reach its sales target of 30 billion euros on Friday, Greece has extended the deadline to buy back government debt until 7 a.m. EDT on Tuesday.

Last week, the government announced that it would spend 10 billion euros, or $13 billion, in a heavily discounted bond buyback program aimed at reducing the country’s growing debt to 124 percent of gross domestic product. However, by Friday, the last day the offer was valid, only 26.5 billion euros worth of bonds had been tendered, and Greece still had 1.15 billion euros remaining from the 10 billion it was allotted to spend on debt retirement.

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The buyback must be successful in order for Greece, which is experiencing its sixth year of recession, to unlock the rescue payment of 34.4 billion euros that the European Union and the International Monetary Fund have been withholding for six months because the country has not yet strengthened its finances or made its economy more competitive.

However, the scheme is ultimately expected pan out, as the fate of Greek banks depends on a successful buyback, and that should ultimately spur enough investor interest. The European Commission is also confident that the full sales target will be met.

A senior Greek banker told Reuters that the government would use the additional day of the offer to exchange another 3 to 4 billion euros worth of bonds. Greece had assigned better-than-expected terms for the bond buyback, with prices set at a premium over market prices, to make the deal more appealing to investors; for the total 26.5 billion euros worth of bonds retired by Friday, the average price was 33.4 percent of face value.

While Greek lenders were hesitant to sell the government all of their bondholdings, which would reduce future profits and interest income, the government has said that a large portion of the bailout will go their recapitalization.

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