Returning to markets: How and when
As Athens ponders a trial bond issue, the experiences of Ireland, Cyprus and Portugal are worth considering
ANALYSIS Encouraging commentsfrom European officials, small steps out of the crisis and falling yields have been among the key indicators over the past few days that an imminent return to the bond markets may be in the cards for Greece.
The yield on 812.5 million euros of three-month T-bills the state sold on Wednesday was 2.33 percent, from 2.70 percent at a similar sale in June. Some observers saw this as providing further confirmation that market conditions are welcoming enough for Greece to dip its toe back in the water with a long-term debt issue.
The T-bills were sold as the European Commission announced that it would be recommending the termination of the Excessive Deficit Procedure (EDP) for Greece, which began in 2009. Given that Greece will have conditions to meet for many years to come, the conclusion of the EDP is mostly symbolic in nature. However, it gains importance within the context of Greece wanting to tap the bond markets for the first time since 2014.
The Commission’s recommendation is another waypoint along the path out of the program and back to normality.
“Obviously, the markets and investors received this week two very strong signals,” said European Economic and Monetary Affairs Commissioner Pierre Moscovici on Wednesday, pointing to last Monday’s disbursement from the European Stability Mechanism of the latest bailout tranche of 7.7 billion euros following the conclusion of the latest review, as well as the news regarding the EDP.
Following last Monday’s Eurogroup in Brussels, ESM Managing Director Klaus Regling was asked about the timing of Greece’s return to the markets. Without discussing specifics, he suggested it is a “good moment” to think about conducting a trial issue. He highlighted that other countries that had been in a program (Ireland, Portugal, Cyprus) also started feeling their way back to the markets gradually.
“It is important to have a good strategy to communicate with markets, so that markets understand it is not a one-off step that is taken; they want to see how it continues in the future,” added Regling.
Amid mounting speculation that the Greek government may opt for a swift return to the bond markets this week, it is worth looking at the experience other program countries had when they conducted their first issues since being bailed out.
Portugal returned to the markets in May 2013 with a 10-year bond before exiting its program in May 2014. Ireland issued its first long-term debt since being bailed out in March 2013. It exited the program in December of that year. Cyprus issued a five-year note in June 2014 but exited the bailout in March 2016.
“The first bond issue was partly politically and partly financially motivated,” says Fiona Mullen, director of Nicosia-based Sapienta Economics consultancy, of Cyprus’s return to long-term borrowing. “It was a way of testing the market, establishing a benchmark and demonstrating that the government could access markets even in the middle of capital controls, a recession and a bailout program.”
In Portugal’s case, the return to long-term issuance was facilitated by the famous “whatever it takes” comment by European Central Bank President Mario Draghi in July 2012, which triggered a decline in financing costs. “That along with strong program implementation, and some better economic results, helped creating confidence in investors,” says Rui Peres Jorge, an economics journalist with Portugal’s Jornal de Negocios.
The 10-year bond Ireland issued in March 2013 was sold at a yield of 4.25 percent, the lowest of the three countries concerned. The decision to tap the markets was determined by two factors, according to Lorcan Roche Kelly, an Ireland-based editor of Bloomberg Markets. “I think the timing was down to two things: 1) Is there market appetite? There was, and 2) The need to establish full market access before the end of the program,” he says. “Obviously the first of these things is the most important.”
For all three former-program countries, tapping the markets was a vital step towards exiting the bailout, but the experts who spoke to Kathimerini English Edition stress the bond issues were part of a wider process.
“Having a visible proof of investors’ confidence in your debt is fundamental,” says Peres Jorge. “Of course, the most important thing is to the be able to keep access to the markets after the first issue. Road shows and a strong communication policy with investors are also fundamental.”
“This [the June 2014 bond] was the first of three international bonds that were issued during the bailout program, so by the time Cyprus was due to exit the program it had a well-established record of tapping the markets at lower rates than it had ever managed before,” says Mullen.
Full market access was also key to Ireland being able to exit its bailout without the need for a precautionary credit line. Prime Minister Alexis Tsipras has claimed he wants to achieve a similar clean exit from the program. However, Roche Kelly warns that the return to the markets has to be handled carefully and, even then, Greece may not be able to copy the Irish example.
“I think the problems Greece has had with implementation of the program will make a clean break much more difficult,” he says. “It would be helpful for Greece to tap markets as soon as possible. But that can only be when the country is sure to get the debt away – Ireland’s 10-year bond was four times oversubscribed. Greece would need those kinds of results to give confidence it could return to a normal issuance calendar.”
Peres Jorge also warns that the decision on when to tap the market should be dictated by a longer-term strategy. “This shouldn’t be a decision driven by short-term political considerations, but rather a mainly technical decision, after consulting market participants, troika institutions, and having confidence that you can assure a sustainable debt reduction over time,” he says. “The last thing you want is to lose market access after having returned to the markets.”
Of course, the longer-term considerations have to be balanced against changing market conditions and a judgment on when they might be most favorable, as Mullen of Sapienta Economics points out. “Greece has a far bigger debt burden than Cyprus and a great many more problems, but if it wants to exit in August 2018 then it would be a good time to start testing the markets with a small issue,” she says. “I’d say the sooner the better, given that global interest rates are on the rise again.”
It is clear from the experiences that Portugal, Ireland and Cyprus had in regaining market access that many parameters have to be considered and that the most crucial factor is weighing up short-term gains against a long-term strategy. Even then, though, the result rather than the motivations will ultimately determine the success of any bond issue, which is the most daunting prospect for Greek decision makers.
In Portugal’s case, the return to long-term issuance was facilitated by the famous ‘whatever it takes’ comment by ECB chief Mario Draghi.