Turbulence expected for possible pilot government bond issue

Turbulence expected for possible pilot government bond issue

Fund managers in London have dubbed Athens’s chances of hitting the markets in the foreseeable future “a midsummer night’s dream,” even if that were to be with some small “pilot” bond issues, as government sources have leaked in recent days.

“Without the completion of the [bailout] review, a detailed and time-specific arrangement of the Greek debt sustainability issue and the sustainable recovery of economic growth, investment interest should be considered pretty much negligible,” a fund manager said.

The reason for that is because the funds that would be able to undertake such a risk already have Greek debt in their portfolios, so they have almost exhausted their margin for Greek risk. Many of those funds have also incurred significant losses due to these positions and are expected to start selling once any notable bond price rise is recorded.

In theory the inclusion of Greek bonds in the buying program of the European Central Bank – which appears increasingly unlikely before the second quarter of 2017 – could raise prices and reduce Greek sovereign bond yields. That might lead the yield of the benchmark 10-year bond from the recent 8.4 percent (up from 8 percent in August) toward 5 percent, the level Greece enjoyed when it last tested the market’s waters in 2014.

As 5 percent is considered an attractive yield in the current market environment, it would possibly make sense even for some institutional investors to buy. But all market participants, with the exception of ultra-short-term aggressive profiteering funds, are waiting for a clear signal from the eurozone and the real economy that the crisis in Greece is heading toward its end, as London sources add.

They do note that if the pilot bond issue by Athens is of a very limited level and has some major international investment banks as underwriters, its coverage would be possible. Its real cost, however, would be would be much higher than the nominal rate, as commissions on issues by countries with Greece’s characteristics can reach up to 4 percent of the capital drawn.

That would mean the country would be borrowing at a real cost around 7-8 percent, which is obviously not beneficial, the same sources stress, adding that the issue would require the approval of the country’s creditors, which in turn would come after the implementation of reforms, the success of the fiscal plans and a change in Greece’s investment climate.

That would also necessitate a much improved international image of Greece in the media, with Bloomberg recently noting that Greek bonds have shown the worst returns out of all European countries in the last three months, while only the stock markets of Nigeria and Venezuela had fared worse than Athens’s.

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