Next bond to be sink or swim mo­ment

Last week’s is­sue should be seen in a wider con­text of sus­tain­able mar­ket ac­cess and pro­gram exit

Kathimerini English - - Focus - BY NICK MALKOUTZIS

ANAL­Y­SIS There was a slightly sur­real feel­ing last week about Greece’s re­turn to the bond mar­kets for the first time in three years.

It says much about the trans­for­ma­tive in­flu­ence of the coun­try’s sit­u­a­tion, or maybe just power it­self, that SYRIZA and New Democ­racy switched roles be­tween 2014 and 2017: Three years ago, SYRIZA screamed from the op­po­si­tion benches that by is­su­ing a five-year bond, the New Democ­racy-led gov­ern­ment was sim­ply lump­ing ex­tra ex­pen­sive debt onto the shoul­ders of Greeks so it could gain po­lit­i­cal points. Last week, the con­ser­va­tives is­sued sim­i­lar charges, while the SYRIZA-led coali­tion ar­gued that the bond is­sue was a sign of Greece be­ing on the road to re­cov­ery.

In each case, a vi­tal de­ci­sion about the fu­ture of Greece’s econ­omy has be­come wrapped up in po­lit­i­cal short­ter­mism. In their rush to de­cry the de­ci­sions to re­turn to the mar­kets, the par­ties have im­bued the bond is­sues with a level of tox­i­c­ity they do not de­serve, cloud­ing peo­ple’s judg­ment about what is in­volved.

Both in 2014 and last week, for in­stance, crit­ics ar­gued that the bond is­sues were an ex­pen­sive pub­lic re­la­tions ex­er­cise be­cause Greece bor­rows from the Euro­pean Sta­bil­ity Mech­a­nism with an in­ter­est rate of around 1 per­cent, which it could never match or bet­ter on the mar­kets. On Tues­day, Greece raised 3 bil­lion eu­ros with a yield of 4.625 per­cent, while in April 2014, the five-year note went for a yield of 4.95 per­cent.

The ob­ser­va­tion that both are ex­pen­sive forms of bor­row­ing is not wrong but it over­looks the pur­pose of the bond is­sues, which in both cases was to re-es­tab­lish a re­la­tion­ship with in­vestors af­ter a long pe­riod in the wilder­ness and to be­gin the process of re­duc­ing the cost of bor­row­ing so that when the bailout ends, Greece can turn to the mar­kets for sus­tain­able fund­ing.

The log­i­cal con­tin­u­a­tion of the ar­gu­ment that Greece bor­rows cheaply from the ESM and not from the mar­kets is that the coun­try should re­main in a bailout pro­gram for ever. It is ex­actly what the cred­i­tors want to avoid, as should all Greek po­lit­i­cal par­ties.

Greece has to stand on its own feet at some point. By next year, when the bailout ends, eight years will have passed since the first me­moran­dum of un­der­stand­ing (MoU) was signed: Al­most a decade of painful mea­sures, fraught ne­go­ti­a­tions, mul­ti­ple scares and fran­tic leg­isla­tive ac­tion that has taken a toll on the peo­ple, the coun­try’s de­ci­sion­mak­ers and its cred­i­tors. It is a process that must come to an end, for ev­ery­one’s ben­e­fit.

One of the key el­e­ments to en­sur- ing that the third MoU can be com­pleted suc­cess­fully is Greece re­gain­ing mar­ket ac­cess for good, which in­volves in­vestors hav­ing some longterm con­fi­dence in the coun­try and Athens be­ing able to bor­row at rea­son­able rates that will not leave it strug­gling to re­pay in­vestors in a few years, trig­ger­ing a new cri­sis.

This is the con­text in which Tues­day’s bond is­sue should be seen, as was the case when the April 2014 note was is­sued. Por­ing over what the yields or spreads were three years ago and where they stood last week will not pro­vide any de­fin­i­tive an­swers. The yield is com­pa­ra­ble with the ones that ac­com­pa­nied the bond is­sues con­ducted by Por­tu­gal, Ire­land and Cyprus as they pre­pared to exit their bailouts. Greece started is­su­ing bonds ear­lier than them (13 months be­fore the end of the pro­gram) but this re­flects the fact that its re­la­tion­ship with the mar­kets is in a worse state than the oth­ers and, af­ter seven years in a pro­gram, it needs more time to re­build trust with in­vestors.

The only vi­tal ques­tion with re­gards to last week’s is­sue is whether it will prove the first in a se­ries of steps over the next 12 months to­ward achiev­ing gen­uine mar­ket ac­cess.

Fi­nance Min­is­ter Eu­clid Tsakalo­tos has sug­gested there will be up to two more bond is­sues by the end of the pro­gram. That is when we will see if Greece’s re­la­tion­ship with the mar­kets is re­turn­ing to nor­mal­ity. Tsakalo­tos sug­gested on Thurs­day that the next bond would be is­sued af­ter there is fur­ther clar­ity on the debt re­lief mea­sures. Athens is hop­ing that soon af­ter the Ger­man elec­tions near end-Septem­ber, the eu­ro­zone cred­i­tors will re­sume dis­cus­sions on what debt re­struc­tur­ing in­ter­ven­tions to make af­ter Au­gust 2018. This en­tails there be­ing no com­pli­ca­tions as a re­sult of the out­come in Ger­many, where the FDP lib­eral party, whose leader Chris­tian Lind­ner has ar­gued in fa­vor of Grexit, looks on course to be­come the next coali­tion part­ner of Chan­cel­lor An­gela Merkel’s CDU.

There have been so many set­backs in the past for Greece that no­body can be cer­tain things will be straight­for­ward this time. How­ever, the path ahead for Athens is clear: Com­plete the next re­view, wait for the debt re­lief dis­cus­sion to re­sume, tap the mar­kets again, build a cash buf­fer, carry out the re­main­ing re­forms to com­plete the pro­gram and then, when the bailout ends in Au­gust 2018, make the most of the im­ple­men­ta­tion of debt re­lief mea­sures as well as any re­turn of growth and op­ti­mism.

In this con­text, the next bond is­sue, and per­haps the one af­ter that, take on a greater im­por­tance than last Tues­day’s. This means that apart from hop­ing its Euro­pean part­ners make head­way on the debt is­sue, the gov­ern­ment’s in­sis­tence that it in­tends to end the next re­view swiftly must prove to be more than rhetoric.

Last week’s bond, which con­sist­ing of a swap as well as a new ten­der, was the equiv­a­lent of cau­tiously dip­ping a toe in the wa­ter: 1.57 bil­lion of the 3 bil­lion raised stemmed from the swap and the re­main­ing 1.43 bil­lion from new money. Fur­ther­more, those who took part in the swap were en­ticed by the gov­ern­ment’s of­fer to pay 102.6 per­cent of the nom­i­nal value of the 2014 bond they held.

The next bond is­sue will have to be a much bolder move. Greece will have to dive in, hop­ing it will be able to swim rather than sink.

In its next bond is­sue Greece will have to dive in, hop­ing it will be able to swim rather than sink.

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