Contrary to Ireland and Portugal, Greece has been sending the wrong signals to investors, following its successful bailout program exit in August. This, coupled with uncertainty about Italy and turmoil in emerging markets, has kept Greek bond yields elevated. If the government wants to bring down borrowing costs considerably, it will have to change tone, emphasizing its commitment to structural reforms to build market confidence. Without it, even the most successful investor relations campaign to communicate the benefits of debt relief measures adopted by the Eurogroup will not be effective.
Although there is a de-escalation of Greek bond yields and spreads since the debt relief deal in June, progress has not been remarkable. Uncertainty about Italy and tumultuous emerging markets, notably Turkey, have been largely blamed for that.
While there is no question that Greek bonds have been adversely affected by these developments, something else has caught the attention of market participants lately.
“It looks as if we did not learn our lesson. Instead of following the examples of Ireland and Portugal after they exited their programs, Greek ministers say they will not honor their commitment to cut pensions in 2019 and talk about spending more on social programs and hirings in the public sector,” said a Greek banker. He added that this is not market-friendly talk and has undermined investor confidence, keeping Greek yields elevated.
He is not alone in pointing out that the country will have to shore up investor confidence to obtain market access at sustainable yields by demonstrating its commitment to reforms, such as slashing pension expenditure, the highest in the eurozone at 16-17 percent of gross domestic product.
“If Greece shows it does not own the post-program reforms, the cost of borrowing will be affected,” said a foreign fund manager in London. In the meantime, they are waiting to hear the premier’s speech at the Thessaloniki International Fair to make up their minds.
On their part, Greek officials point out that the public debt profile is better than other euro periphery countries in the medium-term after the debt relief package blessed by the Eurogroup last June. They cite the low annual borrowing needs as a percentage of GDP through 2032 and the large cash buffer of more than 24 billion euros. The latter can cover the country’s financing needs till the end of 2022 at the minimum, assuming the annual interest bill is paid for by the primary budget surpluses projected at 3.5 percent of GDP till 2022.
The officials think certain practical aspects of the debt relief deal have not been appreciated by the market. To this extent, they reckon a full scale investor relations (IR) campaign to communicate them to the investment community could make the difference. Although such an IR campaign is always useful, we don’t think it will be a game changer as long as the market does not like the government’s rhetoric and deeds.
The officials would also like to boost liquidity in the secondary bond market by reinstituting the repo market where hedge funds and others will be able to borrow securities for short-selling or other purposes. However, this is almost impossible as long as the sovereign credit rating is below investment grade. If the repo became operational, it could even hurt by facilitating the short-selling of Greek bonds, propping up their yields as long as the market did not perceive government rhetoric as market friendly.
To sum up, Greece will have to follow the examples of Ireland and Portugal and demonstrate its commitment to structural reforms to access the bond market on its own at sustainable yields. To this extent, a large scale IR campaign should be welcome but making the repo market operational may not be such a good idea after all as long as the wrong messages are conveyed to investors.
Dimitris Kontogiannis (email@example.com) holds a PhD in macroeconomics and international finance. He has written and reported for Reuters, The Financial Times and Kathimerini English Edition among others. He is currently working for public broadcaster ERT.