As Greece struggles to put its 313 billion euros ($333 billion) of government debt on a safer footing, bidding at its bill auctions remains reliable — remarkably so.
The nation faces its next refinancing challenge on Wednesday. That’s when it auctions 625 million euros of three-month debt. Two days later, 1 billion euros of its Treasury bills mature.
While time is running out for the Mediterranean country to secure the next tranche of aid to avoid default, the government is counting on local banks and institutions to buy its short-term debt. The bid-to-cover ratios of each auction since January have been just large enough, as bidders roll over debt, helping mask the desperate situation the state faces.
“A failed auction in Greece is going to be disastrous in this environment,” said Gianluca Ziglio, executive director of fixed-income research at Sunrise Brokers LLP in London. “I wouldn’t rule out the possibility there was strong and persuasive communication between the Treasury and local banks to make sure that won’t happen. The same people have been participating at each auction.”
Every bills sale since January has drawn bids of 1.3 times the amount of securities on offer. The stability of those auctions partly reflects constraints on both sides, as well as a common interest to keep the government afloat.
Euro area governments that are creditors imposed a limit on Greece’s T-bill issuance at 15 billion euros. Additionally, the European Central Bank capped the amount of short-term Greek government debt it accepts from Greek banks, as collateral for loans, at 3.5 billion euros.
These restrictions were put in place in recent months out of concern that the Greek government might fund itself via domestic lenders that are supported by central-bank cash, a practice that risks violating European law.
Should Greek banks and other auction bidders subscribe again for 1.3 times the bills on sale, they will have two chances to buy the extra 30 percent they sought. Orders from non-competitive bids can be filled, as well as from so-called second-day bids. In recent auctions, both were exercised to the maximum, with Greece selling an extra 30 percent twice.
In Wednesday’s auction, two additional 30 percent tranches of the original 625 million euros face amount of bills for sale would increase the size by 375 million euros, topping off the deal at the 1 billion euros needed to be paid on Friday.
While holding bills involves risks, Greek banks would rather own them than Greek bonds, which are more vulnerable to haircuts, or losses imposed by debtors, according to Steve Major, head of fixed-income research at HSBC Holdings Plc in London.
“Banks don’t have a lot of choices as they need government assets to hold against deposits which have been falling,” said Major. “They look at Treasury bills as being de facto senior, as it’s less likely for shorter-dated securities to face haircuts.”
A spokesman for the Greek finance ministry didn’t respond to a phone call seeking comment.
Greece’s goal is to unlock about 7 billion euros of aid from its existing bailout program. It’s targeting an April 24 meeting of euro-area finance ministers as a deadline for the approval of new money. Greece’s 10-year bonds fell on Wednesday, driving the yield up 10 basis points, or 0.1 percentage point, to 11.93 percent.
Greek banks have thus far participated in liquidity-draining auctions rather than let the country default. That could change if things deteriorate and their deposits keep falling.
“We still believe there will be a deal of some sort that will avert a crisis or Greece leaving the eurozone,” said Lyn Graham-Taylor, a rates strategist at Rabobank International in London. “What the Greek Treasury-bill auctions suggest is that Greece is not in a normal situation, and its risk is that this sort of arrangement can’t go on forever.” [Bloomberg]