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Greek yields in bond return seen reminder of snags

David Goodman & Nikos Chrysoloras

Greece’s planned bond-market return, heralded by lawmakers as evidence of renewed confidence in the nation, will also highlight the progress that’s needed before its rehabilitation is complete.

While Ireland, Italy and Spain auctioned debt at record-low yields this year, Greece will need a premium to lure investors to any new securities, according to Morgan Stanley and ING Groep NV. The nation, which plans to offer 2 billion euros ($2.76 billion) of five-year notes via banks on Wednesday, may pay 5.3 percent to 5.4 percent for that maturity, they estimate. That’s about double Greece’s record-low auction rate of 2.71 percent.

“Greece’s motivation would be that they want to show they can do it,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “They’re taking advantage of the improved confidence in Europe. Of course not everything’s been solved.”

The Greek government has been shut out of bond markets since 2010 and kept afloat with international bailout loans. Those necessitated the regular presence in Athens of officials from the so-called Troika of the International Monetary Fund, the European Central Bank and the European Commission, which became associated with austerity measures that triggered a political and social backlash.

“The country will return to markets, with a slightly high interest rate, which will fall after and Greece won’t remain in this drama of quarterly troika reviews,” Infrastructure Minister Michalis Chrisochoides said on March 18.

The country is planning to announce the sale of five-year notes on Wednesday, two people with knowledge of the arrangements, who asked not to be identified because the matter is private, said on Tuesday. It may increase the size of the sale, depending on demand, one of the people said.

Greece pays about 2 percent in interest on its bailout loans, Deputy Finance Minister Christos Staikouras said last month. Secondary-market yields imply a fair yield of 5.3 percent, Morgan Stanley strategists Paolo Batori and Robert Tancsa in London wrote in a note last week. The rate may be 5.4 percent, Alessandro Giansanti, a senior rates strategist at ING in Amsterdam, said in a report.

“It’s very much symbolic,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. “Even though it’s more expensive than the bailout loan it could mark the start of a return to normality.”

The yield on benchmark Greek 10-year bonds was at 6.16 percent at the 5 p.m. London close on Tuesday. It dropped to 6.12 percent on April 7, the lowest since March 2010 and down from as much as 44.21 percent in 2012. Greek securities returned 30 percent in the year through April 7, the most among sovereign- debt markets tracked by the Bloomberg World Bond Indexes.

It would be irrational for a country that has been ousted from the international bond markets for so long not to take advantage of the apparent appetite of investors for buying Greek bonds, a senior Greek government official said this week on condition of anonymity in line with policy.

Greece, the country that sparked Europe’s sovereign-debt crisis in 2009 after saying its deficit was bigger than previously thought, last sold bonds in March 2010. It has received two financial rescues and swapped existing securities for new 2 percent bonds maturing between 2023 and 2042 as part of the world’s biggest sovereign-debt restructuring in 2012.

Greece sold five-year notes via banks in January 2010, raising 8 billion euros at a rate equivalent to 381 basis points over Germany’s benchmark debt. With Germany’s 1 percent 2019 securities yielding 0.63 percent yesterday, a yield of 5.3 percent would be a premium of 467 basis points. Between 2001 and 2008, yields on the securities at auctions ranged between 2.71 percent and 5.13 percent.

Spain sold five-year securities at a record-low yield of 1.869 percent on April 3, while Italy sold similar-maturity debt at an all-time low rate of 1.88 percent a week earlier. Ireland, another recipient of international aid, sold 10-year bonds to yield 2.967 percent in March, the lowest on record.

Left without a five-year benchmark after its debt swap, Greece should issue a new security to provide a reference point for companies to sell their own bonds, Christian Kopf, a money manager at London-based Spinnaker Capital Ltd. and Miranda Xafa, President of EF Consulting, an Athens-based advisory firm, wrote in a December policy paper for the European Capital Markets Institute and the Centre for European Policy Studies.

The German Finance Ministry welcomes the planned sale, spokeswoman Nadine Kalwey said at a government news briefing in Berlin this week. Greece’s return to bond markets would be a “hugely significant step,” Irish junior finance minister Brian Hayes said last week.

“They want to take advantage of the low level of yields and investors’ hunt for yield,” said ING’s Giansanti. “They also need to cover the financing gap up to 2015 and pre-fund the years beyond. The total average cost of their debt is pretty low and they can afford to pay around 5.4 to 5.5 percent to come back to the market.”

[Bloomberg]

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