Greece can return to international markets with small bond issues next year, European Stability Mechanism (ESM) Managing Director Klaus Regling said in an interview with Kathimerini’s Sunday edition.
For this to occur, however, the German official says, the Greek government must stick to the reform program and, at the same time, make sure it attains a primary surplus “over the medium term.”
Despite the fact that speculation about a possible British exit from the European Union is causing uncertainty in capital markets, Finance Ministry officials remain focused on seeing Greece making a return to markets in 2017.
Regling is on the same page. “I think Greece should be able to go back to the markets in 2017 provided the government follows the agreed reform path under the ESM program,” he told Kathimerini.
“Also, the government should implement credible fiscal policies with a primary surplus over the medium term,” he said, without going into specifics.
The above combination, Regling told the newspaper, “will enhance investor confidence and create the right framework for growth.”
The head of the ESM, which is Greece’s biggest lender, points out that “in the summer of 2014 Greece demonstrated that a return to the market is possible by successfully issuing a 3- and a 5-year bond.”
However, Regling cautions that market financing will be expensive initially compared to ESM loans.
“Therefore I recommend that Greece should be cautious in the beginning and not borrow too much on the markets. But the government should test the market before the end of its ESM program just as other program countries did before they exited their programs,” he said.
Greek financial officials are aware of the risks involved in a market return. That is why they have made it clear that the first bond issues should not aim to cover the country’s borrowing needs, something that could result in Greece finding itself with its back against the wall and would not help keep interest rates low. Like Regling, Greek officials say that the first bond issue must take place while Greece is still in the program.
So the question is: When should a new bond issue take place? According to sources inside the Finance Ministry, the timing will depend on two factors.
1. There should be no ongoing review by Greece’s lenders. This means that if the bond issue does not take place in the next couple of months – a rather unlikely scenario – then it would have to take place after the second program review this fall. The completion of that review will depend on how quickly the government implements the prior actions that must be carried out first as well as the actions of the second review.
The institutions are pressuring Athens to speed up the implementation of the measures so as to demonstrate that Brexit would not have an effect on Greece.
2. Greece must have already entered the European Central Bank’s quantitative easing (QE) program. In other words, investors must know that they can sell any bonds they have bought on the secondary market. The ECB has said that this will only happen after a deal on Greek debt relief. Once this is in place, the ECB will hammer out its own study on the Greek debt, and should it conclude that it is sustainable, then it will include Greece in the QE program.
Furthermore, it must be underscored that the ECB cannot buy bonds as long as a review is pending. This means that the government must have wrapped up the second review. Otherwise, it is likely that it will not manage to benefit from the advantages of QE as the program runs out in March 2017 – unless, as rumor currently has it, the ECB decides to give a six-month extension.