GREEK BOND RALLY PUTS BUYBACK IN DOUBT ...

By GABRIELE STEINHAUSER  and COSTAS PARIS 

BRUSSELS—One of the euro zone's preferred options for cutting Greece's debt load—buying back bonds held by private investors at a discount—is in doubt after the bonds' prices rose sharply, several European officials said on Friday. The rally in outstanding Greek bonds in recent days has made any buyback plan more expensive, eroding the impact it would have on Greece's debt. The rally raises the challenge for euro-zone finance ministers to seal a deal at their next meeting on Monday that would both plug holes in Greece's €246 billion ($317 billion) bailouts and bring the country's debt load to a more manageable level. "The whole buyback operation depends on the price," one of the officials said. "If the price is too high it will not be done." Two other officials confirmed that the buyback has now come into question. Experts from euro-zone member states' finance ministries met on Thursday night and Friday to nail down the technical details of an agreement that will also need the support of Greece's other creditors: the European Central Bank and the International Monetary Fund. The ministers

themselves will hold a teleconference Saturday to resolve some of the remaining questions, the official said. But doubts over the effectiveness of the bond buyback leave the euro zone with even fewer options for bringing Greece's bailout program back on track, after they ruled out taking a cut in the face value of their own loans to Athens. Of all the options being discussed, the bond buyback was the only one that wouldn't hurt the governments' own chances of being repaid. In a buyback, Greece would offer private investors—which still hold some €60 billion of Greek debt—a price significantly below the bonds' face value, allowing the government to quickly retire part of that debt. Greek bonds have been trading at a sharp discount amid doubts that Athens would be able to repay them, despite a restructuring this spring. Since the summer, prices have gone up gradually, amid rising expectations that Greece will stay in the euro zone. On Thursday, bond prices rose to their highest level since the restructuring, after German Finance Minister Wolfgang Schäuble said Wednesday that he would support lending Greece an extra €10 billion to fund a buyback. According to two officials, however, the euro zone is now talking about spending less, likely somewhere around €5 billion.

A Greek official with knowledge of the buyback plan said any offer could be about 30 cents to the euro but has yet to be firmed up.

"We are all kind of nervous about this," the Greek official said. The buyback "will be on a totally voluntary basis so the more prices go up, the less benefit the plan will yield."

 Greek 10-year bonds were trading at just under 34.2 cents to a euro on Friday afternoon in Europe, having traded as high as 35.6 cents to a euro on Thursday.

"For a bond buyback to be effective in reducing debt, a large proportion of the debt stock needs to be in bonds and these bonds need to be available for purchase," said Justin Knight, head of European interest rate strategy at UBS UBSN.VX +0.96% .

"This is not the case in Greece, and so it is doubtful whether buying back bonds from private investors would materially impact Greece's debt dynamics."

One other drawback of the buyback is that a large proportion of the outstanding bonds is held by Greek banks, which would likely need more government help if they were to take more losses.

Euro-zone experts were still discussing other measures to bring Greece's bailout program back on track, including passing back to Greece around 75% of the profits they expect to receive from Greek bonds held by the European Central Bank, according to one of the officials. There was also a plan to cut interest rates on bilateral loans to Euribor plus 0.6 percentage point from Euribor plus 1.5 percentage points currently, the official said.

Extending maturities on bailout loans, cutting interest rates on loans financed through the euro-zone rescue fund and letting Greece issue more short-term debt were also still on the table, among other measures.