By Georgios Gialtouridis
Newton, MA
Greek society is in need of some seriously deep soul searching and self-evaluation. Cultural barriers have to be crossed and ethical values have to be reassessed as fiscal responsibility in a free and democratic society belongs to its citizens and not just to their elected representatives.
It is this long look-into-the-mirror approach which every Greek citizen has the moral responsibility to undertake individually. It’s time for every Mitso, Spyro and Maria to understand that they form the social, cultural and economic backbone of Greek society and it is their actions which determine the direction of such a society.
The soon-to-be implemented EU-IMF mechanism will relieve Greece from borrowing in the financial markets for the next three years and alleviate fears of a sovereign default. It will satisfy the country’s borrowing needs for this three-year period at interest rates slightly above the European benchmark. This mechanism will help Greece roll-over existing debt as well as finance its current budget deficit. It does come at a cost, however, as we see Greek workers express disapproval to the austerity measures taken by the government as a condition to obtain such aid and even an act of terrorism resulting in the deaths of three innocent people.
Using the EU-IMF mechanism wisely is key to dissuade speculators and bring market conditions back to pre-crisis levels. By using the EU-IMF mechanism as a safety net Greece can perform some incredible and strategic acts on the financial markets trapeze.
According to the Ministry of Finance General Accounting Office, Greece’s current national debt stands at approximately 300 billion euros. This is made up of mostly 3-, 5-, 10- and 30-year bonds. The average coupon rate is under 5% and these bonds mature anywhere from May 19 of this year all the way up to 2040.
Government Securities Auctions- Historical Data
The recent Greek sovereign debt crisis caused yield spreads on 10-year Greek bonds to top 1000 basis points, or ten percentage points higher than the benchmark German bund. Aggressive short selling of Greek bonds including naked shorts and credit default swaps against Greek debt including naked swaps have been used by predatory speculators in the secondary market to manipulate Greek bond and T-bill prices as such bets were heavily favoring a Greek sovereign default. Yields have risen likewise on long term bonds as well as short term T-bills.
As bond yields go up the prices of the respective bonds come down and vice versa. This means that Greek sovereign bonds are now being sold in the secondary market at prices considerably under par value and Greece can wisely buy them back taking advantage of these discounts.
Let’s take the 10-year Greek bond ISIN GR0124031650 maturing on July 19, 2019 with an outstanding amount of 15.5 billion euros.
Government Securities Auctions – Historical Data – 10-year Bond
On May 7, 2010 this bond traded in the German Boerse in Frankfurt at 40% under par value due to the recent crisis.
Griechenland EO Notes GR0124031650
This means that at this discount Greece could buy back this debt for less than 10 billion euros and simultaneously wipe six billion euros off its debt burden.
The same applies for the 10-year Greek bond ISIN GR0124029639 maturing on July 20, 2017 with an outstanding amount of 11.44 billion euros. That bond is also trading at a 40% discount.
Deutsche Börse AG: GGB 20 07 2017
Buying back this debt at this discount would wipe another 4 billion euros off Greece’s debt burden. Almost 100 billion euros in 10-year bonds comes to maturity between now and 2019.
Similar discounts currently apply for 5-year Greek bonds.
Government Securities Auctions – Historical Data – 5-year Bond
For instance, Greek bond ISIN GR0114022479 maturing on August 20, 2014 with an outstanding amount of 12.5 billion euros is trading at a 30% discount.
Deutsche Börse AG:GGB 2008
Repurchasing this debt at this discount saves the Greek taxpayer almost 4 billion euros in the next four years. As bonds near maturity they trade at considerably lower discounts and closer to par value. A move to repurchase debt will most definitely increase the market price of these bonds and reduce discounts as the demand rises so such action must be coordinated and implemented at lightning-fast speed.
According to the Ministry of Finance Public Debt Management Agency debt maturing between 2014 and 2019 inclusive totals in excess of 120 billion euros.
ΟΔΔΗΧ:Maturity Profile
If an average pricing discount of 30% below par value is sustained during the repurchase of this debt it would mean a long-term savings of almost 36 billion euros for the Greek taxpayer and this amount could be taken off Greece’s national debt. This reduction in debt will result in Greece’s debt-to-GDP ratio to fall from 120% to a possible 105% immediately. It would also reduce the country’s interest expense by almost 2 billion euros annually which in turn would reduce the annual budget deficit by almost one full percentage point as per the country’s GDP.
In order to raise such enormous funds Greece can exercise some options. A public offering could raise billions of euros from the Greek public alone. Greece can issue 5-year bonds to be bought by the Greek public, corporations, institutions, etc. The amount bought by taxpayers and corporations can be tax deductible. The interest, a respectable three per cent annually, can also be tax-free. Other organizations such as the Church of Greece can also participate as well as investors from abroad. An aggressive advertising campaign should be implemented emphasizing on patriotism and preserving national integrity in order to promote the sale of these bonds.
Another option is to utilize a small percentage of the real estate assets owned by the Hellenic Public Real Estate Corporation (HPREC) or Κτηματική Εταιρεία του Δημοσίου (ΚΕΔ). The value of HPREC’s assets exceeds 300 billion euros. If a fraction of its portfolio is used to securitize debt, asset-backed 5- and 10-year bonds can be issued as most major European banks would be willing to purchase these instruments at interest rates favorable to Greece. These banks can even turn around and borrow back the funds from the European Central Bank at a very low interest rate using these Greek bonds as collateral, less a small ’haircut.’ This offering could also raise tens of billions of euros.
These offerings will not only reduce Greek debt but also help roll-back the debt past the crucial years immediately following the expiry of the planned three-year term of the EU-IMF mechanism thus giving the Greek taxpayer much needed breathing room at that time.
A special commission appointed by the President of the Hellenic Republic comprised of respected members of the business and academic communities, both from within Greece and the Diaspora, should manage the implementation of this program. All proceeds from such bond sales must be used to pay down debt and take advantage of the existing bond pricing discounts. Such strategic debt restructuring will help Greece regain its integrity in the financial markets as well as help ease liquidity and solvency concerns.
Isocrates had argued that the democracy established in Athens was designed to be impartial and create better citizens:
“For those who directed the state in the time of Solon and Cleisthenes did not establish a polity which in name merely was hailed as the most impartial and the mildest of governments, while in practice showing itself the opposite to those who lived under it, nor one which trained the citizens in such fashion that they looked upon insolence as democracy, lawlessness as liberty, impudence of speech as equality, and license to do what they pleased as happiness, but rather a polity which detested and punished such men and by so doing made all the citizens better and wiser.” (Speech 7 Areopagiticus par. 20)
In his speech to the American Newspaper Publishers Association on April 27, 1961 in New York City President John F. Kennedy echoed Isocrates as he praised Solon by reminding us how the ancient Athenian lawmaker “decreed it a crime for any citizen to shrink from controversy.” Greeks have every right to publicly express concern and dissatisfaction to the drastic measures implemented by the government to reduce the country’s debt. But the Greek people must also become more vocal as to how to fix the problem. They must show the world that they are determined to tackle this lingering crisis head-on and win. They can not just stand on the sidelines and expect the IMF to make decisions for them as they merely continue to protest such decisions with work strikes and riots.
I outlined one way to beat market speculators at their own game. Are the Greek people up to the task? Or are they willing to be corralled by the cut throat policies of the IMF, insensitive to individuals’ rights and fundamental freedoms?
It’s never too late to act. The European Union has provided Greece a much needed safety net. The EU-IMF mechanism can and should be used to Greece’s advantage. Greeks must step up and take control.
Or else, it will control them.
