For the first time since 2014, the environment is benign for Greece’s quest to return to the bond markets: the completion of the second bailout review, the improved state of the Greek economy and the revitalized sense of purpose in the eurozone after Emmanuel Macron’s victory in France all pave the road to success. Yield-hungry investors will grab Greek paper even before the country becomes part of the European Central Bank (ECB)’s quantitative-easing program.
The yield on Greece’s 10-year bonds continued to slide last week. As a result, the yield spread between the Greek and German benchmark bonds dropped below 5 percent in Friday trading. Some of the improvement in the valuation of Greek government bonds is clearly the result of the French elections and the perception that European unity is back. It will be good to ride this wave and return to markets.
Greek government officials can use the summer to gauge market sentiment and prepare their pitch. They can go one step further and lay out updated economic growth plans. Fresh from vacation, investors will likely feel even more optimistic about buying Greek paper in September.
The experience of Ireland and Portugal in returning to bond markets after their respective bailouts is instructive. Both countries tapped private investors after two-year absences. In both cases their governments paid less than what market analysts had predicted. And in both cases governments used the positive momentum to strengthen their bargaining positions versus the ECB and the European Commission.
The key indicator of success is the yield Greece will pay on the new bonds. In 2014, the last time Greece tapped global bond markets, the government paid 4.95 percent over five years. The current government may look for a better price to prove that the global investment community trusts Greece more now.
Greece may strengthen its chances of a successful bond issue in ways other than simply pointing to its recent achievements. As a first step, the government may endorse Macron’s proposal for a stronger eurozone as the core of the European Union. Macron has endorsed three ideas for strengthening the eurozone: completing the banking union; fiscal integration, with a Eurozone budget, finance minister and parliamentary oversight; and the issuance of bonds backed collectively by eurozone members. These ideas are not new but they have received a second lease on life in recent weeks. Both separately and in their entirety, they improve investor sentiment.
The release of the European Commission’s latest position paper on the future of the eurozone a month ago is viewed by Brussels and Frankfurt watchers as a warm-up exercise to a comprehensive discussion after the German parliamentary elections in September 2017. Pierre Moscovici, the EU’s economic affairs commissioner and ex-finance minister of France, calls the proposal “an offer that EU countries cannot refuse.” Greece can stand behind the benefits of this offer.
As a second step, Greece may take up a more prominent role in convincing Eastern European countries to join the eurozone. The Czech Republic and Bulgaria already fulfill all formal requirements for eurozone entry. They can be invited to join immediately. Croatia, Hungary, Poland and Romania are close behind, the only concern being some recent volatility of their currencies against the euro. A signal on expedited entry process for these six economies would increase trust in the eurozone as a desired institution. Such a signal will also show Greece in a new light: that of an engaged member of the eurozone.
* Simeon Djankov is senior fellow at the Peterson Institute for International Economics and a former deputy prime minister of Bulgaria.