Given that Greek bonds sell for 12 cents on the dollar, on the surface his plan may seem like a reasonable idea. First let's consider the idea, then potential problems.
Der Spiegel interviews Peter Nomikos who says 'For a Donation of 3,000 Euros, Every Greek Can Buy Freedom'
Greek shipping heir Peter Nomikos has taken matters into his own hands. While EU leaders wrangle for a solution to Greece's problems, Nomikos started a non-profit to wipe out the country's debt. If all of his countrymen do their part, he tells SPIEGEL ONLINE, they will be able to shore up the country's finances.Problematical Math
SPIEGEL ONLINE: Mr. Nomikos, you have just started a campaign to free Greece of debt. Your organization buys up Greek bonds and then forgives the debt. Are you serious?
Nomikos: Professionally, I deal with distressed debt. And it struck me that Greece has a historical opportunity. In the euro, the Greeks have a very strong currency, while the price of their government bonds has collapsed. That makes it possible to buy back debt at very low prices and reduce the Greek debt burden with relatively little expenditure.
SPIEGEL ONLINE: You are asking your countrymen for donations. What do you tell them?
Nomikos: If you break down the national debt, each Greek owes around €25,000 ($31,485). So I am telling my fellow citizens to make themselves debt-free. Greek government bonds with a nominal value of one euro currently trade for around 12 cents. For a donation of around €3,000, every Greek can buy his freedom.
SPIEGEL ONLINE: How many bonds has your foundation already bought?
Nomikos: We always buy those bonds that have the deepest discount. So far we have invested €273,000 ($343,816) and hold €2.2 million ($2.8 million) in Greek debt.
SPIEGEL ONLINE: And then you cancel the debt?
Nomikos: Not immediately. If we did that, we would decrease the impact of our project. When the GDP-to-debt ratio goes down, bond prices go up. If the movement becomes a great success, this could become a problem, because we cannot buy debt as cheaply on the markets. So we hold these bonds for a while and use any profits to buy more bonds. We plan to amass as many bonds as possible and then cancel the debt all at once.
- The population of Greece is 11,316,000. At €3,000 per person, Nomikos would need to raise nearly €34 billion. That is far lower than the €283 billion in bonds (at €25,000 per person), but it is hardly inconsequential.
- Bond prices will not stay at 12 cents on the dollar if the program makes any reasonable headway.
- Greek banks and pension plans are the biggest holders of Greek debt. I highly suspect neither has marked bonds to market. They certainly have not marked the bonds to zero. In other words there are severe implications should Nomikos succeed.
- Those depending on Greek pension plans have a vested interest that he not succeed.
I wish Peter Nomikos success, but point number 3 above suggests severe consequences. Points 1, 2, and 4 suggest that it will not happen in the first place, making point number 3 moot.
Mike "Mish" Shedlock
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