Red-Letter Day In Greek Crisis As Bond Buyback Advances, Merkel Eases Germany's Stance On Future Losses

Greece protest flag 7 Nov 2012 2
Protestors outside the Greek Parliament Wednesday.

A red-letter day for the Greek financial and debt crisis unfolded Monday, as a complex program by which the Greek government will try to simultaneously prop up its banking system and cut its debt began. Meanwhile, German Chancellor Angela Merkel issued a game-changing statement on the future willingness of German taxpayers to take a financial hit to keep Greece in the euro zone.

The bigger news of the day was Merkel’s comment, in which she told the center-right newspaper Bild am Sonntag that Germany would consider taking a loss down the road on the debt obligations Greece would provide it and other creditor European states in exchange for a present bailout.

"If Greece one day again manages with its revenue without getting new debt, then we must look at and assess the situation," she said, noting "that is not the case before 2014-15 if everything goes according to plan."

That marks a clear change from the previous stricter position, which was more politically palatable to the German citizenry. The previous position called for Germany to be repaid in full for its willingness to help its southern European neighbor in its hour of need.

The change is a bold move by the chancellor, who London’s Telegraph says is “fresh from a bruising victory in the Bundestag over Greece's aid plan,” a reference to the fact that even members of her own coalition voted against the rescue package on the premise it was only a stop-gap measure that didn’t account for the true costs of a bailout.

Carsten Brzeski, an economist for ING Groep in Brussels, told Bloomberg that Merkel's pronouncement marked “the end of denial” on Germany’s part on the potential future costs of a rescue.

The timing of Merkel’s statement is important too, coming on the day the Greek government began a complicated program to buy back some of its debt on the open market in order to qualify for further bailout funds. In its essence, the program is meant as a way for Greek banks, still the major holders of Greek debts, to offload assets for cash, taking large write-offs in the process. The next tranche of the international bailout could then be used to prop up the ravaged balance sheets of those institutions.

But the eventual effect of both Merkel’s change of heart and the Greek program will be that banks and financiers will be saved or even profit handsomely from bailouts paid by taxpayers in Athens and Berlin. The Greek buyback program being put into effect Monday involves buying securities from investors at prices between 30 and 40 cents on the dollar. That will cause massive losses for Greek banks, which have long held the debt on their balance sheets at full or par value. The international bailout will cover much of their losses. But Wall Street financiers who recently bought that debt on the open market for as little as 15 cents on the dollar will be able to sell for massive profits.

The markets were ecstatic on the news, with Greek bonds quickly appreciating more than 12 percent to levels near 40 cents on the dollar, on the highest volume seen since the summer.

The Greek ATHEX 20 blue-chip stock market index, was up 2.36 percent and the euro rallied past levels of $1.30 per euro.

Join the Discussion