Access to capital markets essential
Greece’s desire to avoid a third bailout loan to fill the projected financing gap in the 2015-2016 period depends to a large extent on its ability to maintain market access at reasonable interest rates. The sell-off in Greek bonds last week was a reminder of the lingering risks associated with domestic and international economic and geopolitical events. In this respect, the authorities should do their best to safeguard market access and get the economy back to normal functioning.
Greece raised 3 billion euros from the sale of 5-year bonds last April, the first such action since April 2010, and another 1.5 billion of 3-year bonds in July. It plans to raise more money, estimated between 1.5 to 3 billions euro in the autumn by selling 7-year bonds or short-dated debt instruments maturing in more than a year, as well as several billion in the next two years. This is important if it is to fill any financing gaps and avoid a third bailout loan with conditions attached, which could have had serious repercussions on both the political and economic fronts.
In its fifth review of the Greek program, the IMF projected that gross financing needs will exceed gross financing sources by 12.6 billion in 2015. The gap, which opens after May 2015, is calculated on the assumptions of arrears clearance, the collection of privatization proceeds equal to 7 billion euros during the 2014-2016 period and the repayment of IMF loans totaling 19.1 billion over the 2014-2016 time span. It also takes into account IMF loans to Greece in excess of 19 billion euros over the same period and market issuance of 3 billion euros in 2014, among others. It is obvious that some assumptions, like the amount from market access in 2014, are too conservative while others, like the privatization proceeds, appear optimistic. So, it is likely the financing gap will be revised again down the road.
It is reminded that a large part of the Greek financing gap stems from the unplanned use of 11 billion euros in program funding to buy back government bonds with a nominal value of more than 30 billion euros in December 2012. This action aimed at cutting the public debt by some 20 billion euros, or 10 percentage points of GDP, and it was part of a series of measures blessed by the Eurogroup in November 2012. However, an informal commitment by EU officials to replace the 11 billion euros down the road has yet to be honored after the ECB objected to rolling over Greek bonds held by the Eurosystem on the grounds of illegal state financing. In our view, this makes it more likely that a portion of the amount of some 11.3 billion euros earmarked for bank recapitalization will be allowed to be used for filling the country’s funding gap. The amount will obviously shrink if one or more local banks seek capital from the HFSF (Hellenic Financial Stability Fund) after the ECB’s AQR and stress tests conducted by EBA.
Assuming no unpleasant surprises from the fiscal front, the country could cover the funding gap and avoid a third bailout if it taps the capital markets for modest amounts in the next couple of years. The successful conclusions of talks with the EU about debt relief could certainly have a big impact on the country’s ability to maintain market access at reasonable borrowing rates even if international market conditions for periphery credit do not improve. However, the country will have to continue delivering larger primary budget surpluses and confirm signs of an economic turnaround. In this regard, it is very encouraging that it registered a primary surplus of 1.8 billion euros at the general government level in the first half of this year compared to a deficit a year ago. It will be even better if the flash estimate for GDP, expected next week, shows even growth at the margin in the second quarter. If so, it will be the first real GDP growth reading since the second quarter of 2008.
Undoubtedly, political factors will weigh even more on Greek bonds as the time for Parliament to elect a new President of the Republic approaches. The vote is scheduled to take place in the first quarter of 2015 but some scenarios call for a vote as early as this autumn and snap general elections if no candidate succeeds in securing the minimum 180 votes in the 300-seat House. In our view, it is more likely for the 180 votes to be gathered at this point rather than not, though no one can be sure. This is in line with our argument after the June elections for the European Parliament.
Events in the europeriphery, such as the BES in Portugal and the disappointing GDP reading in Italy, have also exposed Greece’s vulnerability to bond yield moves there once again. The same is true with market perceptions about progress in domestic reforms. Obviously, the country cannot do much about events emanating from elsewhere but it can do more to improve its own image in the markets.
Delivering larger primary budget surpluses, counting on a GDP turnaround, satisfying banks’ capital needs after the ECB stress tests and paving the way for successful and smooth negotiations with the EU on debt relief by year-end could help ease market concerns even if the international environment is more challenging ahead. If the political factor is neutralized, this would be even better. In any case, safeguarding Greece’s market access at reasonable rates is essential to avoiding a third bailout to fill the projected funding gap and support economic recovery. [Kathimerini English Edition]
