Nervy in­vestors de­liver timely re­minder

Greece broadly met its tar­gets with its bond is­sue but mar­ket tur­bu­lence was warn­ing for the months to come

Kathimerini English - - Focus - BY NICK MALKOUTZIS

ANAL­Y­SIS The last few days have pro­vided a suc­cinct and well-timed re­minder of the risks and re­wards that lie in store for Greece as this coun­try heads to the end of its fi­nal bailout pro­gram.

For all the con­straints and pun­ish­ment that the three pro­grams have brought, they have also pro­vided a rel­a­tively ster­ile and safe en­vi­ron­ment for the coun­try, which has been kept afloat with low-in­ter­est loans from its Euro­pean lenders.

Ex­it­ing the pro­gram with no credit line means that Athens will have to rely on the money mar­kets for fu­ture fund­ing, and last week’s bond is­sue high­lighted what un­pre­dictable con­di­tions they can pro­vide.

Greek author­i­ties de­cided to de­lay on Tues­day plans to is­sue the seven-year bond that had been in the pipeline for some weeks as a re­sult of the tur­bu­lence on in­ter­na­tional mar­kets and fears that this would drive up the cost of bor­row­ing for Athens.

The post­pone­ment only lasted a cou­ple of days but served no­tice to all the de­ci­sion mak­ers in­volved that al­though Greece’s econ­omy is pick­ing up and the bailouts will soon be a thing of the past, it re­mains in an ex­tremely vul­ner­a­ble po­si­tion and ex­posed to shocks from un­ex­pected sources that may have noth­ing to do with the de­ci­sions taken in Athens.

The bond was made avail­able to in­vestors on Thurs­day and the re­sponse was fairly en­cour­ag­ing.

The Fi­nance Min­istry and the Pub­lic Debt Man­age­ment Agency (PDMA) man­aged to se­cure the 3.5 per­cent yield tar­get that they had been hop­ing for, which was lower than the ini­tial guid­ance of 3.75 per­cent and roughly the rate at which Greece bor­rows from the In­ter­na­tional Mon­e­tary Fund.

Athens also com­fort­ably raised the 3 bil­lion eu­ros that had been set as a goal as bids ex­ceeded 6 bil­lion eu­ros.

In­ter­na­tional in­ter­est

The break­down of in­ter­est was also rel­a­tively en­cour­ag­ing, with around 210 in­vestors lodg­ing bids. The al­lo­ca­tions were led by fund man­agers on 37.4 per­cent, fol­lowed by hedge funds on 31.5 per­cent, and banks, which took up nearly 23 per­cent. The trans­ac­tion also had a broad geo­graph­i­cal spread, dom­i­nated by the United King­dom with 43.7 per­cent, fol­lowed by Greece at 19 per­cent. The over­all in­ter­na­tional par­tic­i­pa­tion was at 81 per­cent.

The pos­i­tives have to be tem­pered against the fact that the rate of bor­row­ing was more than 300 ba­sis points above the Ger­man Bund, which is the ref­er­ence for sov­er­eign debt in the eu­ro­zone, and sub­stan­tially higher than the yield for bonds is­sued by Por­tu­gal, a former bailout pro­gram coun­try of sim­i­lar size to Greece.

Also, trad­ing on the sec­ondary mar­ket on Fri­day saw the bond’s yield rise to 4.015 per­cent, ac­cord­ing to Reuters. “About half went to UK in­vestors which we know are more trad­ing-orientated ac­counts,” an un­named banker told the news agency. “What this deal tells me is that Greece doesn’t have cer­tainty of ac­cess. The bond might re­cover, but at the end of the day, the sig­nal this sends in terms of ac­cess is not great.”

Thurs­day’s trans­ac­tion, though, is part of a broader pic­ture for Greece, which re­turned to the mar­kets last sum­mer af­ter a three-year ab­sence.

Lim­ited time

Athens needs to is­sue bonds to re-es­tab­lish its re­la­tion­ship with in­vestors and to bring its yield curve down, re­gard­less of what is go­ing on around it. At the same time, though, it has only a lim­ited amount of time to do this (un­til the Euro­pean Sta­bil­ity Mech­a­nism pro­gram ends in Au­gust) and can­not af­ford to get it wrong.

If the gov­ern­ment is not able to bor­row at sus­tain­able rates once the bailout has ex­pired, it will have to turn to the cash buf­fer of about 19 bil­lion eu­ros it wants to build by Au­gust. This, though, will only of­fer pro­tec­tion for about a year and a half, and if the mar­kets are not con­vinced that Greece can make a full and sus­tain­able re­turn to bor­row­ing, talk will soon be­gin about the pos­si­bil­ity of a new ESM pro­gram.

Such a devel­op­ment would undo many of the pos­i­tives that have started to emerge as Athens is edg­ing to­ward the end of the third pack­age, be­cause un­cer­tainty will be­gin to take a grip of the econ­omy again.

Th­ese are the dan­gers that were high­lighted over the past few days. They can­not be ig­nored, but that does not mean that Greece should be de­terred ei­ther. The next few months will have to be about build­ing up mar­ket ac­cess and pre­par­ing an exit from the pro­gram that is cred­i­ble and as suc­cess­ful as pos­si­ble.

Three-year paper

Fi­nance Min­is­ter Eu­clid Tsakalo­tos has in­di­cated that the gov­ern­ment would like to sell at least two more bonds be­fore Au­gust. It is thought that the seven-year note will be fol­lowed by a three-year bond be­fore or af­ter the Ital­ian gen­eral elec­tions on March 4 and a 10-year one be­fore the con­clu­sion of the bailout. There have been some sug­ges­tions that the fi­nal is­sue may even be a 12- or 15-year bond.

Pre­dict­ing what mar­ket con­di­tions will be like over the months to come is a dif­fi­cult task given the world­wide tur­moil seen over the last few days. This means that the gov­ern­ment will have to do all it can to en­sure that the other part of the equa­tion, which in­volves paving the way for the pro­gram exit, has to be paid ad­e­quate at­ten­tion.

The Euro Work­ing Group held on Thurs­day con­firmed that just three out of the 110 prior ac­tions from the third re­view are left to ful­fill. The aim is to have th­ese wrapped up by the next Eurogroup on Fe­bru­ary 19. This will clear a path for the fourth re­view to be­gin.

In par­al­lel to the fourth and fi­nal in­spec­tion of the third pro­gram, the coun­try’s cred­i­tors will also have to de­cide on the re­forms they will ex­pect the Greek author­i­ties to im­ple­ment af­ter Au­gust, the debt re­lief pack­age that will be of­fered to Athens and the post-pro­gram sur­veil­lance that will be used by the lenders.

Dur­ing his visit to Athens at the end of last week, Euro­pean Com­mis­sioner for Eco­nomic and Mon­e­tary Af­fairs Pierre Moscovici in­di­cated that ev­ery­thing should be wrapped up dur­ing the June 21 Eurogroup. Af­ter that, Greece will face its sink-or-swim mo­ment. The last few days have em­pha­sized that there could be test­ing days ahead and that con­tin­ued fo­cus will be re­quired rather than cel­e­bra­tions.

The new seven-year Greek bond was made avail­able to in­vestors on Thurs­day and the mar­ket re­sponse was fairly en­cour­ag­ing.

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