Buying up Greek government debt

It has been suggested that the Eurozone might look at the possibility of loaning the Greek government an amount as high as 10 billion euros via the ESM or otherwise  to purchase Greek government debt at a discount in the market and retire it. This could reduce Greek debt by approximately 20 billion plus accruable interest if this exercise is carried out at today's market rates close to 35% of face for 10 year maturities. The benefit would of course be greater for longer maturities as it would trade at a greater discount.

There have been some sounding comments by various bloggers as to whether owners of Greek debt may be willing to part with their holdings at these depressingly low prices and of course many others acknowledging it would be mere stupidity and that under this spectrum it is futile as no one will sell at these levels. 

Prices of Greek government bonds are determined on a daily basis by continuously changing market dynamics at bond dealing rooms at banks & other financial intermediaries. The current price ( if its 35% of face for 10 year instruments) is therefore a price at which willing buyers and sellers exchange these as of this writing. The fact the EZ may pre-announce the possibility of such a program implies that market expectations automatically will shift & improve and thus market participants may only now be willing to sell their holdings at continually higher prices automatically lowering yields and improving Greece's borrowing costs. As prices rise the Greek government pays more for its own debt that it buys and thus the bond holders also receive more so the effective government gain is reduced but equally Greece's position in the market improves. 

It is therefore nonsensical to suggest, as some have, that there will be no sellers simply because prices will rise to the level that sellers will become willing. There is of course the possibility of prices rising by such an amount as to make the whole exercise futile, but then the Greek government would have benefited by considerably lowering its debt yields without having spent one penny.

This is a measure long overdue.   

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