Making the most of our recovery signs

Greece should start thinking about building its yield curve in the second half of the year, capitalizing on a likely primary budget surplus, encouraging signs from the tourism industry and the big concession works that seem set to restart in the next few months. The issuance of 12-month treasury bills could be the first step in a slow process which may also involve the securitization of real estate and other assets, paving the way for the country’s gradual return to the capital markets. In so doing, it will have to take a look at finding ways to maximize revenues by managing and developing state assets in addition to outright sales.

The execution of the state budget in the first quarter is encouraging, pointing to a primary budget surplus at the general government level over the same period. The state budget is the biggest component in the general government accounts. It is noted that revenues exceeded expenditure without interest expenses by more than 500 million euros in the January-March period, outpacing the deficit target of 2.34 billion euros according to preliminary data. Even if unfavorable adjustments are made to allow for bigger tax refunds and payments to the private sector, the primary outcome is much better than the goal in the first quarter.

Of course, this development should come as no surprise since Greece has taken austerity measures worth more than 5 percentage points of gross domestic product this year to turn a likely primary budget deficit of less than 1 percent of GDP in 2012 into a small surplus. Even accounting for the adverse recessionary effects, a primary surplus at the general government level should be easily achieved. Nevertheless, it will be a milestone in the country’s quest to put its public finances in order and the first primary surplus since the early years of the 21st century.

Although some government officials in the past had pinned their hopes on a primary surplus for Greece’s return to the capital markets, this does not look realistic at this point. The primary budget surplus may help sentiment and prompt some rating agencies to upgrade Greece, but it is not likely to convince developed market investors, some of whom have suffered great losses from their Greek bond and equity holdings, to buy debt paper again. It will take the removal of the redenomination risk by mutualizing eurozone debt or/and underwriting Greek debt for this to happen.

Nevertheless, some foreign investors may be willing to bid for a relatively modest issue of 12-month T-bills after the second quarter, assuming Greece keeps on handily beating the fiscal targets and expectations of a good tourism season materialize along with the restarting of the four big infrastructure projects. This will enable the country to make an important first step in building its yield curve. Greece has auctioned T-bills of up to six-month maturities so far with domestic banks taking the lion’s share.

The country may also have to find some extra funds to deal with the holdouts of last year’s sovereign debt restructuring, known as PSI (private sector involvement). These holdouts represent a risk of default, according to some experts, and could have been convinced to sell earlier rather than waiting until maturity. This way the state could also lighten its debt burden although admittedly not by much. The country’s creditors should support such a move, which could help market sentiment and a faster return to the markets.

Moreover, Greece could try to sell securities issued by an ovecollaterilized special purpose vehicle (SPV) with real and other assets. A tranche of securities may be secured with assets while another tranche may be unsecured, simply bearing the Greek risk. Obviously, the SPV will contain assets which have not be passed to the Hellenic Republic Asset Development Fund (TAIPED). It is not an easy task and the cost of funding may be high but the securities backed by the assets of the SPV could sell at a lower interest rate than Greek government bonds of the same maturity. The maturities could range from two to five years although appetite may exist only for the shorter-dated paper. The money raised could be used to repay part of the European Financial Stability Facility loan used to finance last December’s debt buyback, which cut debt by some 10 percentage points.

The Public Debt Management Agency (PDMA) should normally play a key role in the country’s effort to dip a toe in the markets and build its yield curve. This is in addition to handling state guarantees to pension funds, derivatives etc. However, it is clear that something is missing since TAIPED is primarily responsible for disposing of state assets ranging from real estate to equity stakes in listed companies. An entity has to manage and develop assets to maximize their value and potentially take the SPVs mentioned above under it.

TAIPED could play this role, but that would require enhancing its scope and transforming it into a developer as well as a seller. Alternatively, a new entity, some suggest a sovereign wealth fund, could be set up to play this role, keeping TAIPED separate or under it.

All in all, increasing signs Greece will produce a primary surplus this year, perhaps bigger than projected, coupled with a good tourist season and a boost from relaunching the four big highway projects should encourage the authorities to take some major steps toward the country’s return to the markets. Sell 12-month T-bills to mostly foreign investors and also sell asset-backed securities. Assigning the management and development of state assets to a new or existing entity should also be part of the strategy.

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