Greece prepares to fly solo on bond markets
LONDON: Once the outcast of European bond markets, Greece appears firmly on the road to redemption.
After years of austerity, the expiry of an 86 billion euro (US$100 billion) bailout in August will mark the end of an era in which Greece defaulted, 10-year yields topped 40 per cent and the country came perilously close to being kicked out of the euro.
Now, as Greece follows fellow financial crisis victims Ireland, Spain, Portugal and Cyprus back into the fold, it needs to lure longterm investors into its bond market so the country can fund itself independently once the bailout cash runs out.
That could happen with a new bond issue to tap into positive sentiment around the end of the country’s third bailout, inclusion in European Central Bank bond purchases or further credit upgrades for its debt which is still rated junk.
“The sun is shining on Greece. It is in a radically different place and ratings agencies are very likely to continue to upgrade the country,” said Nick Gartside, international chief investment officer for fixed income at JP Morgan Asset Management, which manages US$1.7 trillion of assets. A significant milestone would be for the European Central Bank (ECB) to include Greek bonds in its massive quantitative easing (QE) stimulus scheme once the bailout ends.
As Greece is rated below investment grade, it has only had access to cheap central bank cash because it is part of a bailout programme. The ECB has made clear that once Greece leaves the programme its waiver will be revoked.
To be included in QE, Greece would need to pass an ECB debt sustainability analysis and that is unlikely to happen until the country has implemented reforms agreed in June with Eurogroup creditors to ease its debt profile.
At almost 180 per cent, Greece has the highest ratio of debt to gross domestic product in the euro zone. Analysts at HSBC, however, noted that Greece was considered a special case by euro zone authorities, implying there could be some leniency on the conditions it needs to qualify for QE.
If the ECB is satisfied Greece’s debt is sustainable, this would pave the way for Greek bonds to be included in the final months of QE, or at least be included next year in the bank’s programme to reinvest proceeds from maturing bonds.