Re­turn­ing to mar­kets: How and when

As Athens pon­ders a trial bond is­sue, the ex­pe­ri­ences of Ire­land, Cyprus and Por­tu­gal are worth con­sid­er­ing

Kathimerini English - - Focus - BY NICK MALKOUTZIS

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.

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