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From the FT's Lex blog

Self help is the order of the day in Greece. Thieves walked off with paintings by Picasso and Mondrian from the national gallery in Athens over the weekend. Market value: priceless; resale value: anybody's guess. Now National Bank of Greece has invited investors in for a haircut. The country's biggest bank by assets has offered to buy back €1.5-billion of covered bonds and nearly €400-million of hybrid securities it issued over the past couple of years. It aims to turn debt into core equity capital. Any investors who do not accept the offer are gambling that Greece can manage its way out of its debt spiral.

NBG sold the covered bonds at full face value in 2009, but the market price had fallen to about 55 per cent. The bank is offering to buy the bonds back at 70 per cent. That looks generous: although the bonds are twice collateralized, the prospect that investors will be repaid in full when the bonds mature in 2016 looks remote given Greece's dire financial and economic prognosis. Private-sector holders of Greek sovereign bonds face a 60 per cent writedown on their investments when (or if) another bail-out is agreed.

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NBG is likely to accumulate only about €650-million from this capital management operation. To put that in context, the European Union and the International Monetary Fund say the Greek banking sector needs an extra €30-billion of capital. The key to saving NBG lies in Finansbank, its Turkish subsidiary, which it bought for €5.5-billion in 2006. Today, it is worth about €4-billion, while NBG itself has a market value of barely €1.3-billion. It is looking to offload at least some of the Turkish asset -- and should do so before Turkey's roaring economy suffers a hard landing, which looks disconcertingly likely.

Investors should accept NBG's buy-back offer: a better one is unlikely to materialize. Bank bondholders can no longer escape the consequences of the euro zone calamity.

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