Europe’s Bond Crisis: Why a Secondary Market Buyback Makes Sense

There is one thing that the European Finance Ministers meeting in Luxembourg know that the rest of the market does not: whether they will let Greece default. This is valuable information that they can and should take advantage of. My guess is that the debate taking place is all about how much a bailout will cost and who should pay. The reality is that Greece will get support.

So why not use this information to reduce the cost of the inevitable bailout? Greek 10 year bonds are trading at 54 cents to the dollar and two year bonds at 63 cents. European governments can effectively cut the cost of a bailout by 30-50% by buying the bonds cheaply and offsetting the capital gain at maturity.

Is this ethical? Yes. European Finance officials have been jawboning the market for years so they cannot be accused of deception by putting their money where their mouth is. Governments and Central Banks deal in their own and other countries’ securities every day so it is hardly unfair market practice.

In fact, in the case of Greece, one reason that bonds have sold off is that there are no natural buyers for Greek bonds as they do not belong to an index. If the European governments fill this void then order will very quickly be restored to the secondary market.