If Greece wants to stand on its feet and stop relying on bailout funds, it will have to gain market access while carrying out the reforms and bearing the fiscal straitjacket of the third economic program. The government should not hesitate to try to tap the bond markets in July, starting a process that will hopefully make it possible to refinance state debt at sustainable, low interest rates after the planned end of the program in August 2018.
Greece was able to borrow from the markets at affordable rates in 2014, just two years after the biggest sovereign debt restructuring in history (PSI). However, this market access turned out to be temporary due to political risk. At the time, then premier Antonis Samaras sought a clean exit from the second bailout program as creditors were unwilling to make concessions. This raised market concerns about the country’s ability to borrow without a safety net.
Samaras adjusted his position by favoring an enhanced conditions credit line (ECCL) from the European creditors without any International Monetary Fund involvement after the program ended. However, this turned out to be unconvincing as the markets braced for the presidential elections at end-2014 with conservative New Democracy trailing left-wing SYRIZA in the polls. The presidential elections triggered national elections, leading to SYRIZA’s rise to power.
Things look different today. From the markets’ point of view, the political risk appears to be comparatively lower as the ruling coalition of SYRIZA and right-wing Independent Greeks (ANEL) implements the program while the main opposition conservative New Democracy is also in favor of the bailout.
The market seems to expect that the next elections will take place in the second half of 2018 at the earliest as SYRIZA clings to power while lagging behind in the polls. The elections are scheduled for the fall of 2019.
Moreover, it is becoming increasingly clear the lenders do not want to see Greece in a similar bailout program after the current one expires. Therefore, some at least seem to be willing to make the unused funds from the current 86-billion-euro strong bailout program available to Greece if necessary under certain conditions. The government has already legislated austerity measures to be implemented in 2019 and 2020 to ensure a primary surplus of 3.5 percent of GDP.
The market has reacted favorably to the Eurogroup’s decision in mid-June to provide Greece with new loans totaling 8.5 billion euros. The European Stability Mechanism (ESM) will shortly disburse 7.7 billion and later 0.8 billion on the condition Greece pays off part of its state arrears to the private sector.
Although the finance ministers’ decision has put paid to government hopes for the inclusion of Greek securities in the European Central Bank’s bond-buying program – popularly known as QE (quantitative easing) – anytime soon, Greek debt has rallied.
The yield of the 10-year bond has fallen to 5.4-5.5 percent from around 6.0 percent at the end of May. The drop has been more pronounced at the short end. The yield on the 2-year bond fell to 4.2 percent from around 6.0 percent at the start of June.
Moreover, the Greek yield curve has become upward sloping with interest rates at the short end lower than long rates. The curve was flat or inverted before. The normalization of the curve shows the market has drastically downgraded Greece’s probability of default.
Undoubtedly, Greece will be fully funded until the summer of 2018, assuming the program is implemented smoothly, so it does not have to borrow from the markets. On the other hand, the country needs to start the process to gain market access via syndicated issues and exchange auctions that will help refinance its debt at sustainable rates when the program ends.
Obviously, Greece cannot wait till the end of the bailout program to do so. Barring extraordinary events that could upset world markets, July looks like a good month to start this process. One way to do it would be to issue a new, small 5-year bond issue and make an offer to swap it with the bond expiring in 2019 issued in 2014 as suggested by a government official.
This way, Greece can capitalize on the bond rally and extend the maturity on this portion of debt. The new issue could also lure in some money from the 2.0-billion-euro 3-year bond expiring in July as some investors want to extend the maturity of their Greek bank holdings on a more positive outlook regarding the country’s prospects. It could also tap Greek banks’ desire to swap their 2019 bonds for longer-dated securities. Alternatively, it could issue a new 3-year bond to refinance the maturing one.
Even without QE, Greece could test the markets in July, hopefully before the ECB’s anticipated decision to taper off its bond-buying program. Once again, the real hurdle could come from politics. For example, the government would not want the new 5-year issue to have a higher coupon and yield-to-maturity than the 4.75 percent and 4.95 percent respectively featured on the 5-year bond issued in 2014.
In my view, starting the process of Greece’s return to the markets is more important than paying a slightly higher yield since more benefits will accrue later on. It is possible though the new bond will carry the same or a lower coupon and yield to maturity compared to its predecessor in 2014 as yields have fallen sharply. Greece could get an indication of potential demand and yields from market participants by pilot fishing the issue. Of course, Greece’s non-investment credit rating remains a hurdle since it restricts demand to mainly speculative accounts such as hedge funds.
* Dimitris Kontogiannis, PhD in international finance, is a financial journalist at state broadcaster ERT and a former regular contributor to Kathimerini English Edition.