The need for corporate bonds

Greece’s entry into EMU (Economic and Monetary Union) was supposed to lead to the introduction of a series of new investment products spurred by the low interest rate environment. Indeed, local banks rushed to take advantage of the new landscape by launching a number of new products; but corporate bonds, touted by some as the country’s next hot item, failed to register on the top of the list, mainly thanks to the lack of a secondary corporate bond market. Although local companies have little reason to care about corporate bonds at this stage, others such as government officials, banks and investors, individual and institutional alike, have a vested interest in getting this market started. It is well known that the collapse of the Athens stock market in the last couple of years has diminished the appetite of local investors for assuming more risk. Instead, Greeks have sought refuge in products they are familiar with, such as money market funds, repos and typical bank deposit accounts. This is happening at a time when deposit rates have fallen to levels not seen by local investors in decades. On the other hand, the typical small to medium-sized local corporation, listed or non-listed, continues to show its preference for traditional bank loans because it can still borrow at extremely low margins over the benchmark interest rates by EU standards. Of course, a handful of big corporations, such as OTE or the Public Power Corporation, seeking to borrow large sums of money, have tapped the international markets by issuing straight corporate bonds. Senior bankers and others recognize the need for this new market to blossom because it will allow banks to make money, give local investors another investment alternative more suitable to their risk-return profile and give small- to mid-sized companies access to other financing schemes at a time the Athens bourse continues to slump and banking credit is certain to become more expensive as banks rationalize their lending practices. Corporate bonds seem to suit the Greek investor long accustomed to high-yielding domestic financial instruments bearing relatively low risk. They may even delay the process of international portfolio diversification seen in other small EMU countries such as Portugal and Belgium, or even reduce the expected capital outflows in the years to come. Although everybody understands the significance of having a well-developed local corporate bond market, little has been done so far. The few corporate bond issues by Greek corporates have failed to ignite much interest. Being understandably small issues means having large bid-ask spreads; and with the general public being largely uneducated, this translates into a lack of end clients, forcing banks to take them on their books. Bankers are quick to shift the blame to the lack of an organized secondary bond market and do not hide their preference for an electronic secondary corporate bond market using the platform of the Bank of Greece, the country’s central bank, or the existing secondary bond market for government bonds. They say banks have the expertise to do so. But others, including brokers, argue that the Athens bourse is the right place to house the secondary corporate bond market. But even before a commonly accepted solution to the platform is found, the so-called dematerialization of corporate bonds has to precede without delay. Although things are different now, it should not be forgotten that it took Greece several years to convert physical shares into electronic form. In addition, Greek companies have to adopt international accounting standards, improve corporate governance and seek some kind of credit rating. On the other hand, local banks will have to start thinking about the day after, putting in place the right infrastructure, train their personnel to analyze and trade corporate bonds and market them to end clients, individual and institutional investors. They will also have to ensure that the pricing of the loans given to corporations embodies the risk they undertake. With their profits under pressure, it is certain that banks will adjust their lending margins upward sooner or later to get in more revenues, therefore making credit more expensive to companies that will then seek a way out. Things may move slowly in Greece, but once they get going there is a deadline within which they usually can be done. Unfortunately, there is no clear deadline for the development of the Greek corporate bond market. However, its is high time for all interested parties to get together and do something about it because investors, corporations and banks need it, and may need it badly in the not-so-distant future. Agricultural Life, part of Agricultural Bank, boosted premiums by 28.4 percent. Profits in contrast plunged to 423 million drachmas from 1.6 billion drachmas following lower investment revenues.

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