By: DailyForex.com
There is an old joke that has it that if you owe the bank ten thousand pounds then you have a problem, but if you owe ten million pounds then the bank has a problem! Faced with a situation where a debtor cannot honour their obligations, creditors can decide that the best course of action is to sell the debt on to a third party at a discount. This means that the creditor does not suffer a total loss on their investment (but instead takes a write-down), recouping a fraction of the original debt. The body buying such a distressed debt is gambling that the debtor will be able to pay a higher proportion of the face value of the debt at a later date, giving them a profit on the deal.
Following on from Monday’s meeting where Eurozone finance ministers and IMF representatives agreed that Greece should be granted the next tranche of funding under the two bailout accords, Greece is set to embark on a programme of buying back some of its own distressed debt. The IMF has made it clear that its contribution to the funding will be contingent on the success of the buy-back which they see as an essential component of the strategy to get Greece’s debt back under control.
The value of Greece’s distressed 10-year debt has risen from 15% in June to stand at about 35% of its face value today. If Greece can buy back part of its debt at this rate, then it will achieve a 65% saving over the face value of the bonds purchased. The target is that the buy-back should alleviate up to €40 billion worth of Greek debt, but there are some doubts concerning the willingness of Greece’s creditors to take the hit on their investment. If you believe that Greece can avoid a default and will stay within the Euro, then you may hold on to the debt and demand full payment when the bonds fall due. If you are concerned that without IMF support and in view of the problems facing the Greek economy that its future within the bloc is far from assured, the temptation would be to take “the bird in hand” now.