Ignorance continues to reign on the overpriced bonds issue

It has been more than two months since the affair of the two Greek government bonds bought at extraordinary high prices by a few pension funds broke out and it keeps on going strong, revealing something very worrisome for Greek society as a whole – a huge deficit of knowledge about bonds and markets in general from a country that has been a member of the EU since 1981 and the eurozone since 2001. Prime Minister Costas Karamanlis may have found a good excuse to get rid of Labor Minister Savvas Tsitouridis whose ministry oversees the pension funds recently but this did not do much to take the bond affair out of the limelight. As expected, the opposition parties have found a popular issue over which to hold the government accountable and hammer at, while the latter has been unable to manage the bond crisis in any satisfactory way, making early elections look like a way out. Greece is scheduled to hold general elections in the Spring of 2008. The polls show the gap between the ruling conservatives and the main opposition socialist party has closed, largely due to the bond scandal, which in turn shows the public is not satisfied with the government’s claim of zero tolerance toward corruption. The public also appears not to be buying the government’s argument that it was the Capital Market Commission that brought the overpriced bonds to the surface by taking action against intermediaries, namely brokerages, for charging pension funds excessive commissions. On the other hand, it is encouraging that the markets have taken this case in stride despite all the hoopla. The 10-year yield spread between the Greek and the German government bonds has been hovering between 23 and 24 basis points during this period. It should be noted that one percentage point equals 100 basis points. The bond market is dominated by financial institutions and is regarded by many as a better gauge of the intentions of market participants. Perhaps, if there are victims in this bond scandal, it is the banks, domestic and foreign, who hoped to get millions of euros in revenues from managing the bond issues of Greek and other private firms. All of these have been frozen following the bond scandal since no issuer wants to take responsibility. Of course, this leads to some kind of paralysis that has to be addressed by the government but has done little to shake the local markets. Even if one looks at the Athens stock market, it is difficult to make the case that it has been affected by the bond affair even though some argue that it has stopped some foreign funds from buying bank stocks that are thought to have sold structured bonds or/and hybrid products to pension funds. In addition to poisoning Greek political and social life, the bond affair has also exposed Greek society’s other peculiarities and weaknesses. TV commentators who had no idea about bonds until the scandal broke out but professed expertise in other areas such as ship wrecks and foreign policy have been quick to voice their opinions. Also, politicians and trade unionists who have had little knowledge of bonds are busy giving their opinions. In this kind of environment and given the unwillingness of people who know the subject well to participate on the TV shows, the public is more confused than ever. This is especially true with the structured bonds issued by the state, whose future coupon is not fixed but dependent on formulas, usually the difference between the 10 and the two-year euro interest rates (CMS). In this regard, it is no surprise that the par value of any bond has become equivalent to its fair price. According to this logic, which would have made one a laughing stock in any serious European country, any bond bought below the par, that is, 100 percent of the face value of the bond, is considered cheap and any bond purchased above the par is expensive. This theory is being facilitated by the fact that these structured bonds are not traded on any organized market and so there is no readily available yardstick to judge whether pension funds paid too much, too little or a fair price when they purchased them. This makes it easier for misunderstandings and confusion to prevail in the general public. Given the circumstances, it is no surprise that any local bank, especially those that are state-controlled, and pension funds which have bought any of the eight structured bonds issued by the state in the last two years and again in February 2007 are suspected of paying too much. The fact that there are two documented cases in which pension funds bought a straight fixed coupon rate bond and a structured bond, both issued by the state at excessively high prices makes everybody suspicious. Already, JP Morgan Chase, the manager of the 280-million-euro structured bond issue, has offered to take it back if the other intermediaries agree to it. Still, this does not mean that the final investors, whether banks or pension funds, of these structured bonds have paid an excessive price for them. They may or not have but this will not become obvious until these bonds are evaluated by third independent parties at the time of purchase. This should have been done a long time ago but even now it is not too late. However, this point is lost in a country where the few who know the workings of these bonds stay on the sidelines for fear of being accused of cover ups or other acts. So, ignorance continues to reign and the par of any bond continues to be regarded as its fair price, while anybody who has bought one of the eight structured bonds is considered guilty even before the trial about the fair price begins. This is a pity for a eurozone country.