Deutsche Bank and Morgan Stanley Replace Bozo T. Clown for the Greek Buyback

The one thing that Greece has done right (with the approval of the EU/IMF/ECB troika) in the last three years of its crisis, is to finally consult the market in order to get their buyback completed satisfactorily. Two weeks ago, when Bozo was on the job, I was skeptical of their success. Fortunately, the Greeks called in the expertise of Deutsche Bank and Morgan Stanley for advice which, mercifully, they followed.

The two banks basically told the politicians that if they wanted to get a deal done then they have to pay up. The offer released last Monday surprised everybody in that it was both structured as a Modified Dutch Auction and the lower range was a full 10% higher than the previous market closing. Someone in government finally understood that dancing around the edges in markets is a game that market professionals win at – offer a quick profit, on the other hand, and they will pounce on it.

The message from the Europeans, however, is pretty clear – Greece will not restructure its publicly issued debt again if at all possible. For example, Germany hinted at some form of official debt forgiveness in preference to forcing a haircut on private bondholders again. If this is true, then default risk on Greek debt has just diminished significantly. Can the holdouts expect to profit?

Studies of buybacks in the corporate bond markets suggest weakness for one to three months in bond prices following the completion of the offer for more than 70% of the offers studied. After three months, bond prices tend to rise. Based on this scenario it would seem that the recovery in Greek bonds may well be the big news in 2013.