Bond demand strong but at a cost

Greece’s first bond auction for the year met with strong demand yesterday, easing concerns over the country’s ability to fund its massive deficit. Demand for the five-year bond reached about five times the initial offered size, fueling investor appetite for Greek stocks and the euro, but success came at a hefty price. «It was very important that this deal goes well. This certainly confirms our view that Greece will certainly be able to finance its debt in 2010,» Sarah Carlson, Moody’s lead analyst for Greece told Reuters. Greece initially went to the market to borrow 5 billion euros but demand for the government paper reached 25 billion euros, according to the Finance Ministry. The total amount Greece borrowed reached 8 billion euros in a move some analysts said was aimed at helping ease concerns over the government’s immediate funding needs. The premium Greece paid to sell the bonds was considerably above levels paid in the past. Initial price guidance on the deal came in the area of 3.75 percentage points over the risk-free benchmark mid-swaps rate. However, the huge level of demand for the bonds allowed lead managers on the deal to cut the premium on offer to 3.5 percentage points. The euro gained after news that demand for Greece’s bond was strong, rising 0.4 percent to a day high of $1.4191. Westpac Banking Corporation ended its recommendation to sell the euro against the pound after news of the Greek bond sale and data on UK retail sales. Greece’s problems have heightened uncertainty for the euro currency in recent weeks as it has turned the spotlight on the fiscal challenges of other weak euro members such as Portugal, Spain and Ireland. Stocks on the Athens bourse jumped 2.8 percent yesterday in a bank-led rally after losing some 25 percent over the last three months on concerns about the country’s fiscal health. The difference in the premium demanded by investors to hold Greek 10-year bonds over German Bunds fell below 300 basis points, down from around 310 basis points late on Friday. The Finance Ministry described the outcome of yesterday’s bond auction as proof that it will be able to pull off this year’s borrowing program, adding that the high cost reflects the need for Greece to work on its poor credibility record. «At the same time it shows that the steps being implemented by the government are in the right direction,» the ministry said in a statement. The government is expected to borrow about 53 billion euros this year. OECD sees the right steps The Organization for Economic Cooperation and Development’s secretary-general said yesterday Greece is taking the right measures to turn around its fiscal deficits and he isn’t concerned the country will default on its debt. «They’re taking the right measures,» Angel Gurria said of the Greek government, in an interview with Dow Jones Newswires on the sidelines of an economic forum in Paris on Latin America. «If need be, at some point in time, I think the creditors are going to understand that if they’re taking the right measures; clearly they should be supported,» Gurria said. Such support could come in the form of debt renewals and rolling over existing debt, Gurria said. Meanwhile, the European Commission denied yesterday a story in German magazine Der Spiegel which claimed a report by the EU executive voiced concern that some countries’ rising budget deficits could undermine the bloc’s monetary union. «The article seems to be quite sensationalist and does not reflect the Commission’s analysis of the situation,» EU Commission spokeswoman Amelia Torres said.

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