‘Expectations of early elections and possible political instability immediately after the confidence vote and passing the FYROM name deal would not provide an ideal framework for issuing, which is why I think Prime Minister Alexis Tsipras and his backers will do their best to boost expectations that they will carry on,’ says Gianluca Ziglio, senior fixed income strategist at Continuum Economics.
Foreign analysts discern a window of opportunity for Greece’s return to the international bond markets immediately after Parliament votes on the Prespes name deal with the Former Yugoslav Republic of Macedonia, as the bond issue is seen serving as a useful tool for the ruling party’s election narrative.
A flurry of activity recorded in recent days in the Greek bond market, and especially in the five-year segment with the yield dropping to a four-month low of about 3.1 percent, appears to be paving the way for a new issue.
Bond market experts tell Kathimerini that the issue of a new five-year bond, maturing in 2024 when Greece’s obligations will be relatively low, would be a wise strategy at a value of 2 to 3 billion euros and a yield forecast between 3.50 and 3.75 percent.
They also warn that a bigger issue, both in terms of size and maturity, would entail several risks, given the “existing competition from bonds issued by other countries in the eurozone, at a time when Greece has a far lower credit rating from international agencies.”
A Greek bond issue has been long anticipated in the markets, but the yield of the new bond will be far above the current rate in the secondary market, DZ Bank bond market analyst Sebastian Fellechner tells Kathimerini.
“A new syndicated issue has been discussed by the market since the last deal in February 2018. As noted, there is no urgency owing to the large cash buffer. But for a cautious return to the capital markets an issuer has to appear regularly at the primary market. Greece – as a sovereign issuer – should keep in touch with its investor base as well as with the banks,” he notes.
“The latest syndicated deals (in the government bond market) this month all went pretty well. I think the issuance size (for a Greek government bond) between 2-3 billion euros is quite realistic currently. The yield at issuance is hard to estimate. Currently, 2023 Greek government bond yield trades at around 3 percent. A new issue might be priced well above that level,” Fellechner adds.
Danske Bank bond analyst Jens Peter Sorensen argues that “it would make great sense to do a five-year bond at the current environment – they may even go to the 10-year segment. This is due to the significant demand we have seen at syndicated deals from Portugal, Italy, Belgium and Ireland, despite that European Central Bank has ended QE – especially the Italian deal was very impressive.”
Sorensen further points out that if “investors receive a healthy pick-up and most likely a decent new issue premium – and with the rally in the core European Union markets and ECB on hold for an extended period – then demand for yield is there. I would stick to the five-year segment and no more than 3 billion. One challenge is that many of the investors that buy the Italian bond may not be able to buy Greek due to the rating and there is the risk that the debt office have to rely on hedge funds as was seen in the seven-year deal last year.”
Raffaella Tenconi, senior macroeconomist at Wood & Co, sets the bar lower as she would opt for an issue worth just 2 billion euros. “In terms of appetite, I doubt it will be huge because Greece seems to have fallen out of people’s attention lately, so even the size is above 2 billion euros that is probably fair. We find Greek bond valuations attractive at this juncture, but the fact that the market is very illiquid makes it difficult to find investors that would be willing to have a lot of exposure.”
Credit Suisse economist Oliver Adler is quite optimistic, as he tells Kathimerini that “yields in Greece should fall over time as the economy gradually recovers and confidence rises. Further stabilization in Italy would also help. So, the Greek government might see better prices in the future. At the same time, issuing bonds soon might be a smart strategy to shore up confidence in the ability of the government to issue debt.”
Gianluca Ziglio, senior fixed income strategist at Continuum Economics, agrees, saying that “market conditions appear still quite favorable at present, as the political situation has not had a negative impact on spreads and market volatility so far, most likely because the market is focused on the assumption that the government will survive and things would then go back to normal.”
“This certainly provides an opportunity to issue as soon as the next major political hurdles are overcome instead of waiting too long. Despite the large cash buffer, Greece needs to reopen market access before the buffer starts to be depleted by this year’s financing needs, leaving less financial headroom for 2020 and beyond,” says Ziglio.
“The choice of a five-year bond makes sense in this regard as it is sufficiently long for the government to avoid piling up short term debt (as it would be for a three-year issue or shorter), falling in the 2024 maturity bucket where Greece has very little bonds maturing so far, without bearing too much exposure for investors as would be the case with a 10-year bond. As far as the yield is concerned, I would say 3.50-3.75 percent, depending on the exact maturity (it would likely be issued with a slightly longer maturity than exactly five years),” he argues.
For Ziglio, a bond issue would also be important “as it could be flagged as a success in economic policy.”
“Expectations of early elections and possible political instability immediately after the confidence vote and passing the FYROM name deal would not provide an ideal framework for issuing, which is why I think Prime Minister Alexis Tsipras and his backers will do their best to boost expectations that they will carry on,” Ziglio adds.