Market urges caution on new bond issue

Market urges caution on new bond issue

The improvement observed in Greek bond prices last month convinced the government to start making plans for its next market outing to take advantage of the more favorable conditions for the country and move a step closer to the much prophesied “clean exit” from the bailout program in August.

However, over the last few days the domestic market has seen high volatility, especially last week. This factor, combined with the mood dominating international markets, which does not favor risk-based strategies, geopolitical dangers and monetary policy that is making investors more reserved, has led Greece’s Public Debt Management Agency (PDMA) to take a wait-and-see stance for now.

Still, investors and funds believe that tapping the markets at this point would be the wrong move, and point to the not-so-successful seven-year bond issue in February.

Although the Greek government has not yet reached any final decision on the next bond issue, bankers say it would be quite difficult to find investors right now – even if Greece’s prospects have improved. Therefore one option for the PDMA would be to court the set of investors which stayed out of the PSI bond swap last November.

They note that many US investors who hold these kinds of bonds, with total funds of 3 billion euros, did not participate in the exchange of the bonds originally issued in 2012, for tax or other reasons related to the legal system under which the bonds were issued; they could be approached again in the context of a new swap procedure.

The same sources add that it appears the US funds would prefer any new issue to concern the benchmark 10-year debt. The PDMA is determined to test the waters with a roadshow in the US later this month.

It is true that investors’ memories of the seven-year bond issue in February remain fresh, and the funds remain quite reserved about talk that the Greek government may decide to make any moves during this period. Attractive as the Greek bonds may be, thanks to the progress Greece has made, they would be reluctant to participate in any new issue in the coming weeks.

Mark Downing, senior portfolio manager at BlueBay Asset Management, which has not yet decided on its participation in a possible new Greek bond issue, remains optimistic: “We remain positive toward Greece and have increased our exposure in Greek securities. We believe that Greece is very cheap compared to other eurozone periphery countries, such as Portugal.”

He adds that he will continue to watch Greece, as the continued progress, as he views it, supports the improvement of credit prospects. Notably, before the issue of the seven-year paper three months ago, Downing had stated that his fund would take part in the issue if the terms were attractive.

Another senior portfolio manager, Nicholas Wall at Old Mutual Global Investors, continues to view Greek bonds in a positive light, but sounds the alarm over the prospect of a new sovereign issue by Athens.

He says there are three reasons for his optimism, the first being that Greek and European policies are aligned. A “clean exit” would – rightly or wrongly – offer European politicians some vindication that their approach toward Greece was correct, including French President Emmanuel Macron for placing Greece among his priorities.

Meanwhile, Wall stresses, Prime Minister Alexis Tsipras sees that the “clean exit” from the bailout program would enhance his re-election chances and give the country a new start: A Greece that is able to tap the markets for funding is convenient for all parties.

Secondly, Wall adds, a serious debate has begun on the issue of easing Greece’s national debt, which will be linked to the course of the country’s gross domestic product growth, so it has been formally accepted that the Greek debt will have to become sustainable. However, this will come with some degree of surveillance, which investors who are concerned about the Greek government’s policy once the bailout program ends will view as a kind of security.

Thirdly, the recent flows of news and messages regarding Greece have generally been positive, with the good results of the Greek banks’ stress tests, the sizable primary surplus and the high purchasing managers index (PMI) readings. Athens has also started building up a considerable cash buffer.

Nevertheless, Wall warns that Greece should be cautious and not get carried away with bond issues. He tells Kathimerini that the last bond issue evolved badly and some investors will not be so willing to commit to a new one, opting perhaps to make purchases in the secondary market after the auction.

Liquidity conditions have also deteriorated in general, he adds, with a number of emerging markets recording a negative course, while many portfolios are in the mood to reduce risk. He notes that this would have a direct impact on Greece, as in investors’ eyes it is an emerging market.

Wall further notes that many more issues concerning the Greek program remain open, and there is no clear outlook. He explains that investors may not be in favor of committing funds until they are aware of the surveillance level the Greek government and its creditors will agree to. He acknowledges that Greek bonds staged a rally last year, as the government is seen to have moved toward improving investor confidence, but adds that the Greek spreads are not so generous anymore. Therefore, he concludes, investors may well decide to sit out a new issue and avoid any involvement until the outlook becomes clearer.

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