Greek Banks Drive Bill Rates Below EU Loans in Post-Crisis Sale

For the first time since getting bailed out in May, Greece sold Treasury bills at an interest rate below the 5 percent charged by the European Union when it rescued the nation from default.

The domestic auction suggests that confidence among banks in Greece, which purchased 80 percent of the 1.625 billion euros ($2.1 billion) of 26-week bills today, is growing. Prime Minister George Papandreou’s government cut wages, postponed retirements and raised taxes to trim the euro-region’s second- highest budget deficit and restore investor willingness to lend.

“It’s an encouraging sign that Greece can finance its short-term requirement,” said Michiel de Bruin, who oversees $32 billion of European government debt at F&C Asset Management in Amsterdam. “It’s a step in the right direction. But it’s perhaps too early to say the situation has turned in the euro zone. Investors are still focused on how the austerity measures are implemented.”

The bills due Jan. 14 were sold at a rate of 4.65 percent, the Public Debt Management Agency in Athens said today in a statement. Investors bid for 3.64 times the bills offered, the agency said.

Papandreou, 58, pledged to overhaul Greece’s pension system to secure 110 billion euros in emergency loans from the EU and the International Monetary Fund. The pension vote follows passage in May of 30 billion euros in austerity measures.

Raising Revenue

His government has adopted budget cuts and additional revenue-raising measures worth more than 14 percent of gross domestic product since it took office in October. Finance Minister George Papaconstantinou said last week the country may beat a target to reduce the budget deficit to 8.1 percent of gross domestic product this year from last year’s 13.6 percent of GDP, the second highest in the euro region.

Europe’s debt crisis was triggered after Papandreou’s Pasok party took power and said the deficit was more than 12 percent of GDP, twice the previous government’s estimate. That sparked a surge in bond yields as Standard & Poor’s and Moody’s Investors Service cut the nation’s credit rankings to below investment grade.

Portugal earlier today had its credit rating cut two levels to A1 at Moody’s. The ratings company cited risks economic growth will remain weak after the nation allowed its budget deficit to balloon.

Portuguese Bonds Fall

Portuguese bonds extended declines after the rating cuts, with the yield on the benchmark 10-year security rising 10 basis points to 5.54 percent. That widened the yield premium investors demand to hold the bonds over German debt of similar maturities, the benchmark for the euro region, by 5 basis points to 285 basis points.

Papaconstantinou said he was satisfied with the results of today’s auction, and said the government may resume bond sales next year.

“We are satisfied,” Papaconstantinou told reporters in Brussels today. At least 10 foreign banks took part, he said.

While the rate at the auction was lower than estimated by some strategists, it was still the highest since a sale of similar-maturity bills on Sept. 30, 2008, two weeks after the collapse of Lehman Brothers Holdings Inc., when the rate was 5.09 percent.

“The auction today looked good, but the real test for me would be when they return to the bond market to borrow longer term,” said Wilson Chin, a fixed-income strategist at ING Groep NV in Amsterdam.

Elevated Yields

Two-year notes extended gains following the sale, with the yield of the debt due in March 2012 falling 158 basis points to 9.50 percent. The cost of insuring against default on Greek bonds through credit-default swaps fell 16 basis points to 828.5, the lowest level in three weeks, according to CMA DataVision prices.

Greek bond yields still show elevated concern about a default. Ten-year bonds yield 756 basis points, or 7.56 percentage points, more than German debt. While that’s down from a record 965 basis-point spread on May 7, just before a 750 billion-euro EU-IMF regional rescue was announced, it’s about three times the average of 256 basis points since the Lehman failure.

Signs are emerging that the economies of the most indebted members in the euro region may be stabilising. Italian manufacturing rose 1 percent in May from April, and Spain’s climbed for a third month, government reports showed in the past two weeks. Ireland’s Central Statistics Office said June 30 that the economy expanded for the first time in more than two years in the first quarter.

Tax Increases

Papaconstantinou said yesterday that he expected deficit cuts in the second half of 2010 to be as good as in the first six months.

The government has raised taxes on tobacco, fuel and alcohol and the broadest value-added tax was raised to 23 percent from 19 percent. Public workers had their bonus payments eliminated and their overall wages reduced. The planned overhaul of the pension system means they will have to work longer and will collect less when they retire. The administration has also begun a crackdown on tax evasion aimed at boosting revenue through cutting exemptions and deductions and clamping down on underpayments.

The government plans to raise another 3 billion euros from the sale of state-controlled assets including Hellenic Railways Organization SA and Thessaloniki Water & Sewage Co SA.

Deficit Shrinks

The measures may be having an effect. The budget deficit fell by 46 percent in the first half of the year, with revenue rising 7.2 percent, helped by the tax increases, the Finance Ministry said yesterday.

Foreign buyers accounted for 20 percent of the bill purchases today, according to Petros Christodoulou, head of the debt agency in Athens. Christodoulou said he was satisfied with foreign participation even as non-domestic buyers had bought around 30 percent of the bills at sales in the past.

“The fact that the requested amount in the first auction after the country entered the EU-IMF regime was covered 3.6 times should be considered as a success,” said Fokion Karavias, general manager of global markets at EFG Eurobank Ergasias SA in Athens. “The success of the coverage ratio has boosted confidence.”

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.