Greece should tap mar­kets amid low po­lit­i­cal risk

Elec­tions are not ex­pected un­til the sec­ond half of 2018 at the ear­li­est and cred­i­tors do not want a fourth pro­gram, so the time is ripe

Kathimerini English - - Focus - BY DIM­ITRIS KONTOGIANNIS *

ANAL­Y­SIS If Greece wants to stand on its feet and stop re­ly­ing on bailout funds, it will have to gain mar­ket ac­cess while car­ry­ing out the re­forms and bear­ing the fis­cal strait­jacket of the third eco­nomic pro­gram. The gov­ern­ment should not hes­i­tate to try to tap the bond mar­kets in July, start­ing a process that will hope­fully make it pos­si­ble to re­fi­nance state debt at sus­tain­able, low in­ter­est rates after the planned end of the pro­gram in Au­gust 2018.

Greece was able to bor­row from the mar­kets at af­ford­able rates in 2014, just two years after the big­gest sov­er­eign debt re­struc­tur­ing in his­tory (PSI). How­ever, this mar­ket ac­cess turned out to be tem­po­rary due to po­lit­i­cal risk. At the time, then pre­mier An­to­nis Sa­ma­ras sought a clean exit from the sec­ond bailout pro­gram as cred­i­tors were un­will­ing to make con­ces­sions. This raised mar­ket con­cerns about the coun­try’s abil­ity to bor­row with­out a safety net.

Sa­ma­ras ad­justed his po­si­tion by fa­vor­ing an en­hanced con­di­tions credit line (ECCL) from the Euro­pean cred­i­tors with­out any In­ter­na­tional Mon­e­tary Fund in­volve­ment after the pro­gram ended. How­ever, this turned out to be un­con­vinc­ing as the mar­kets braced for the pres­i­den­tial elec­tions at end2014 with con­ser­va­tive New Democ­racy trail­ing left-wing SYRIZA in the polls. The pres­i­den­tial elec­tions trig­gered na­tional elec­tions, lead­ing to SYRIZA’s rise to power.

Things look dif­fer­ent to­day. From the mar­kets’ point of view, the po­lit­i­cal risk ap­pears to be com­par­a­tively lower as the rul­ing coali­tion of SYRIZA and right-wing In­de­pen­dent Greeks (ANEL) im­ple­ments the pro­gram while the main op­po­si­tion con­ser­va­tive New Democ­racy is also in fa­vor of the bailout.

The mar­ket seems to ex­pect that the next elec­tions will take place in the sec­ond half of 2018 at the ear­li­est as SYRIZA clings to power while lag­ging be­hind in the polls. The elec­tions are sched­uled for the fall of 2019.

More­over, it is be­com­ing in­creas­ingly clear the lenders do not want to see Greece in a sim­i­lar bailout pro­gram after the cur­rent one ex­pires. There­fore, some at least seem to be will­ing to make the un­used funds from the cur- rent 86-bil­lion-euro strong bailout pro­gram avail­able to Greece if nec­es­sary un­der cer­tain con­di­tions. The gov­ern­ment has al­ready leg­is­lated aus­ter­ity mea­sures to be im­ple­mented in 2019 and 2020 to en­sure a pri­mary sur­plus of 3.5 per­cent of GDP.

The mar­ket has re­acted fa­vor­ably to the Eurogroup’s de­ci­sion in midJune to pro­vide Greece with new loans to­tal­ing 8.5 bil­lion eu­ros. The Euro­pean Sta­bil­ity Mech­a­nism (ESM) will shortly dis­burse 7.7 bil­lion and later 0.8 bil­lion on the con­di­tion Greece pays off part of its state ar­rears to the pri­vate sec­tor.

Al­though the fi­nance min­is­ters’ de­ci­sion has put paid to gov­ern­ment hopes for the in­clu­sion of Greek se­cu­ri­ties in the Euro­pean Cen­tral Bank’s bond-buy­ing pro­gram – pop­u­larly known as QE (quan­ti­ta­tive eas­ing) – any­time soon, Greek debt has ral­lied.

The yield of the 10-year bond has fallen to 5.4-5.5 per­cent from around 6.0 per­cent at the end of May. The drop has been more pro­nounced at the short end. The yield on the 2-year bond fell to 4.2 per­cent from around 6.0 per­cent at the start of June.

More­over, the Greek yield curve has be­come up­ward slop­ing with in­ter­est rates at the short end lower than long rates. The curve was flat or in­verted be­fore. The nor­mal­iza­tion of the curve shows the mar­ket has dras­ti­cally down­graded Greece’s prob­a­bil­ity of de­fault.

Un­doubt­edly, Greece will be fully funded un­til the sum­mer of 2018, as­sum­ing the pro­gram is im­ple­mented smoothly, so it does not have to bor­row from the mar­kets. On the other hand, the coun­try needs to start the process to gain mar­ket ac­cess via syn­di­cated is­sues and ex­change auc­tions that will help re­fi­nance its debt at sus­tain­able rates when the pro­gram ends.

Ob­vi­ously, Greece can­not wait till the end of the bailout pro­gram to do so. Bar­ring ex­tra­or­di­nary events that could up­set world mar­kets, July looks like a good month to start this process. One way to do it would be to is­sue a new, small 5-year bond is­sue and make an of­fer to swap it with the bond ex­pir­ing in 2019 is­sued in 2014 as sug­gested by a gov­ern­ment of­fi­cial.

This way, Greece can cap­i­tal­ize on the bond rally and ex­tend the ma­tu­rity on this por­tion of debt. The new is­sue could also lure in some money from the 2.0-bil­lion-euro 3-year bond ex­pir­ing in July as some in­vestors want to ex­tend the ma­tu­rity of their Greek bank hold­ings on a more pos­i­tive out­look re­gard­ing the coun­try’s prospects. It could also tap Greek banks’ de­sire to swap their 2019 bonds for longer­dated se­cu­ri­ties. Al­ter­na­tively, it could is­sue a new 3-year bond to re­fi­nance the ma­tur­ing one.

Even with­out QE, Greece could test the mar­kets in July, hope­fully be­fore the ECB’s an­tic­i­pated de­ci­sion to ta­per off its bond-buy­ing pro­gram. Once again, the real hur­dle could come from pol­i­tics. For ex­am­ple, the gov­ern­ment would not want the new 5-year is­sue to have a higher coupon and yield-toma­tu­rity than the 4.75 per­cent and 4.95 per­cent re­spec­tively fea­tured on the 5-year bond is­sued in 2014.

In my view, start­ing the process of Greece’s re­turn to the mar­kets is more im­por­tant than pay­ing a slightly higher yield since more ben­e­fits will ac­crue later on. It is pos­si­ble though the new bond will carry the same or a lower coupon and yield to ma­tu­rity com­pared to its pre­de­ces­sor in 2014 as yields have fallen sharply. Greece could get an in­di­ca­tion of po­ten­tial de­mand and yields from mar­ket par­tic­i­pants by pi­lot fish­ing the is­sue. Of course, Greece’s non-in­vest­ment credit rat­ing re­mains a hur­dle since it re­stricts de­mand to mainly spec­u­la­tive ac­counts such as hedge funds. * Dim­itris Kontogiannis, PhD in in­ter­na­tional fi­nance, is a fi­nan­cial jour­nal­ist at state broad­caster ERT and a for­mer reg­u­lar con­trib­u­tor to Kathimerini English Edi­tion.

The po­lit­i­cal risk ap­pears to be com­par­a­tively lower as the rul­ing coali­tion im­ple­ments the pro­gram while op­po­si­tion New Democ­racy is also in fa­vor of the bailout.

Newspapers in English

Newspapers from Greece

© PressReader. All rights reserved.