BUSINESS

Investors still don't think Greece will exit euro

By David Goodman

As Greece heads toward 11th-hour funding talks with its euro-area membership on the line, bondholders are surprisingly sanguine about its failure so far to secure a deal.

Forget the strategists at Commerzbank AG who say there’s a 50 percent chance it’ll leave the currency bloc, and those at Barclays Plc who put the exit risk higher even than in the 2012 debt crisis. The Bloomberg Greece Sovereign Bond Index shows those with money at stake aren’t seeing a significant increase in the chances of a euro-zone departure.

The index, a market-value weighted measure of Greece’s bonds, was at 90.89 at Thursday’s close. That’s 24 percent above its five-year average. And it’s more than five times higher than the 17.2 level reached in 2012 as a slump in Greek securities pushed the nation to accept an international bailout and implement the biggest debt reorganization in history.

“Things are much calmer this time,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “If you go back to 2012 there was a big fear the whole system would collapse. Most people do expect a solution.”

That’s been the view of bulls including Pacific Investment Management Co. and hedge fund Greylock Capital Management, who said they still saw value in Greek bonds after the election in January of the anti-austerity Syriza party. The show of faith contrasts with movements in debt markets earlier this decade that toppled governments, pushed countries to accept financial bailouts and took the region to the brink of breakup.

‘Different Market’

“Comparing the spreads and movement now with 2012, it’s a totally different market,” said Daniel Lenz, lead market strategist at DZ Bank AG in Frankfurt. In 2012 “the risk of a default was priced in. If you look at the yield levels we are currently seeing, markets seem to be less tense.”

Whether that remains the case may depend on how negotiations progress at a meeting of finance ministers in Brussels on Friday. Following Syriza’s election, Greece and its euro-area peers are at odds over the formula needed to extend the country’s 240 billion-euro ($273 billion) rescue beyond its end-of-February expiry. With the Greek state and its banks shut out of financial markets, it’s dependent on emergency aid to stay afloat.

The Greek government wants to dial back on some austerity measures required in exchange for the funding, and submitted its proposal on Thursday. While Germany, the biggest country contributor to the rescue and chief advocate of economic reforms, rebuffed the proposal, it left the door open to an agreement at Friday’s talks.

Deja Vu

As lawmakers’ shifting positions emerged through the day on Thursday, Greece’s 10-year bonds rose and held onto their gains, pushing the 10-year yield eight basis points lower to 9.92 percent.

Yields fell to 9.90 percent at 8:01 a.m. London time. Their peak this year of 11.40 percent was still below the five-year average of 13.85 percent, and all-time high of 44.21 percent in 2012.

When earlier negotiations were halted abruptly on Monday, and Greece said it couldn’t accept “absurd” demands from its creditors, Commerzbank raised its estimate on the chances of the nation exiting the euro to 50 percent from 25 percent. That’s a higher probability than in 2012, according to Christoph Weil, the Frankfurt-based bank’s senior economist.

Lower Volatility

“Greece has been played out much more in the media than in the markets,” Kerry Craig, a London-based global market strategist at JPMorgan Asset Management, which oversees $1.7 trillion, said in a February 19 interview on Bloomberg Television’s “Countdown” with Manus Cranny and Mark Barton. “Largely what we’re seeing is that we’ve been through this before, markets know what’s going to happen with Greece. Eventually we will get to that resolution.”

The yield on the 3.375 percent 2017 securities issued in July was fell six basis points to 17.00 percent on Friday. It reached 21.91 percent on February 10. That was the highest for equivalent-maturity notes since March 2012, when the rates surged to 136 percent before bondholders wrote down about 100 billion euros as part of the financial rescue that kept Greece in the euro area.

The difference between the day’s highest and lowest rates on the 10-year benchmark, an indication of volatility and liquidity, was 89 basis points on February 17, the day after the debt talks broke off. That wouldn’t have been in the top 100 biggest differences in 2012.

While credit-default swaps signaled Thursday that there’s a 69 percent chance the nation will default within the next five years, on March 2, 2012, they indicated a 99 percent chance of default.

With the risk of an exit seen as lower than in the past, the biggest investors see no repeat of Greece’s pariah status.

“When we look at Greece we think it’s a lot more sustainable than people might think,” Alan Higgins, U.K. chief investment officer at Coutts & Co. in London, which oversees about $48 billion, said in a Feb. 17 interview on Bloomberg Television. “Exit is extremely unlikely.” Greek debt “will rally on an agreement and potentially we’ll buy into that,” he said.

[Bloomberg]

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