Greece’s bondholders are back at the precipice and the difference between winning and losing comes down to the brinkmanship of the nation’s new leader.
Bulls, whose ranks include Greylock Capital Management’s Hans Humes, say investors are safe because it’s only debt owed to institutions such as the European Central Bank that Prime Minister Alexis Tsipras wants to renegotiate. Bears say one false move by the 40-year-old premier risks Greece tumbling out of the euro area and defaulting.
“If you listen carefully to what these people are saying, they’re not threatening a restructure of these bonds,” said Padhraic Garvey, global head of rates strategy at ING Groep NV in London. “There’s a lot of risk priced in, which is why I like Greek government bonds.”
Markets so far aren’t showing confidence in Tsipras, with bond traders demanding about six percentage points of extra yield to own three-year notes instead of those maturing in 10 years. That means investors see a greater risk that Greece restructures its debt sooner than later.
Tsipras is aiming to water down the financial conditions that underpin Greece’s 240 billion-euro ($272 billion) rescue from the euro region and International Monetary Fund, as well as negotiating on some debt repayments. He needs to move fast because the current bailout agreement expires on February 28. Meanwhile, obligations are coming due, with 1 billion euros of Treasury bills maturing as soon as next week.
The bond market reacted with trepidation to the January 25 election that swept Tsipras to power. Yields on three-year notes reached 18.88 percent, from 10.08 percent before the vote, exceeding levels when the nation received its first financial rescue in May 2010. Bond-risk soared and stocks plunged, wiping about $10 billion off the value of the country’s banks.
This week’s slump is based on a misunderstanding, according to those sticking with the bonds.
Syriza, the party Tsipras heads, has made clear it won’t ask private holders to take losses, according to Greylock’s Humes, who said this week his $870 million company was “very enthusiastic” about Greek debt.
Markets have overestimated the likelihood of Greece leaving the euro area and there may be favorable opportunities to buy the nation’s securities in coming weeks, said Lorenzo Pagani, a Munich-based money manager at Pacific Investment Management Co.
“Clearly a default would be a big mess in terms of investor confidence” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. “We are still looking at a compromise and maybe at least see some form of extension of the debt, better terms and pushing them so far out that by the time it becomes important the market has probably moved on.”
Recent history shows the risks and the potential rewards of owning Greek securities, the powder keg that ignited Europe’s sovereign debt crisis. It’s less than three years since it was subject to the biggest restructuring in history, which cost private bondholders about 100 billion euros.
On the other hand, investors who’ve held Greek bonds since that event in 2012 have been rewarded with the biggest returns among developed markets tracked by Bloomberg World Bond Indexes. The more than 200 percent gain compares with a 27 percent return for the euro area as a whole.
Markets calmed in Greece on Thursday with bank stocks rebounding as the government sought to downplay some of the comments by its new ministers. Deputy Prime Minister Yiannis Dragassakis said they were due to inexperience.
The statements, including a pledge to increase the minimum wage and to halt privatizations, also questioned European Union sanctions on Russia. They were perceived by investors as “provocative and calculated to distance” the government from its creditors, Michael Michaelides, a rates strategist at Royal Bank of Scotland Group Plc in London, wrote in a Jan. 28 note to clients.
Tsipras also gave assurances that Greece won’t make any unexpected moves regarding its finances in talks with European Parliament President Martin Schulz in Athens on Thursday.
Even before Greek voters turned to the more hard line Syriza party, negotiations between the nation and its creditors had stalled as former Prime Minister Antonis Samaras balked at demands for more belt-tightening, opposing further wage and pension cuts.
Tsipras has said that Greece should receive a “significant haircut” on the amount it owes, which German Finance Minister Wolfgang Schaeuble and Jeroen Dijsselbloem, chair of the euro region’s group of finance ministers, have rejected.
Greece has more than 300 billion euros of debt outstanding, including its bailout loans. It has to refinance bills on February 6, followed by 1.4 billion euros on February 13, according to data compiled by Bloomberg. The government typically would do that mostly through local banks, which are suffering from an outflow of deposits. A standoff with creditors and potential exit of the euro area, would deprive the lenders of support from the ECB.
Bond trading signals losses could be in store for investors. Three-year yields jumped almost 600 basis points this week to 15.97 percent on Friday in Athens. Ten-year rates rose 151 basis points to 9.92 percent.
“The savage bear flattening that we have seen in the Greek curve does resonate very well with what we saw during the euro crisis as the market priced in the greater risk of some form of default,” said Richard McGuire, head of European rates strategy at Rabobank International in London. “This doesn’t necessarily imply Greece walking away from its debt, and it could also reflect the heightened possibility of some form of restructuring” that pushes bond prices lower, he said.