Greece Selling Diaspora Bonds Mimics Israel in Looking Overseas

Nina Vacratsis left Greece 64 years ago, and the old country is counting on her more than ever.

The 72-year-old retired human resources worker from Sarnia, Ontario, is one of about 11 million people of Greek descent spread across the U.S., Canada, Australia and other parts of the world. The Greek government plans to ask them next year to buy bonds as debt-market investors avoid them following this year’s financial rescue of the country.

“The U.S. had war bonds people bought to help the country when it was at war so in a way this is an economic war Greece is fighting right now,” Vacratsis said by telephone from her home 5,200 miles away from Athens. “If in a small way I can help at this point then sure, why not?”

The country will follow Israel and India by turning to loyal citizens living abroad to buy so-called diaspora bonds. Since Greece received a 110 billion-euro ($146 billion) package of loans from the European Union and International Monetary Fund in May, it hasn’t managed to sell bonds with a maturity of longer than six months on regular markets since April. That was the month Standard & Poor’s cut its credit rating to junk, or non-investment grade, because of the higher risk.

“The diaspora has a lot of wealth and Greece has a sizable diaspora,” said Dilip Ratha, an economist at the Washington- based World Bank who has studied alternative financing. “The question is do Greek diaspora members want to invest in the country and how much faith do they have in the country.”

Soaring Costs

Interest costs for Greece are more than four times higher than for Germany based on 10-year bond yields and twice that of Portugal, one of the countries investors expect might follow Greece and Ireland in needing a bailout. The cost of insuring against non-payment for Greek debt also is more than twice that of Portugal, according to data compiled by CMA.

Greece’s 6.25 percent bonds due in June 2020 are rated BB+ by S&P and Ba1 by Moody’s Investors Service, both one notch below investment grade. Sovereign bonds of former Soviet state Azerbaijan and Egypt are rated the same level.

Diaspora bonds will tap millions of Greeks abroad who want to help the country, Finance Minister George Papaconstantinou said in September. The country plans a first issue next year, he said. There are as many Greeks living overseas as the 11 million at home, he said.

A diaspora bond “is something that we want to do,” Papaconstantinou said. “We’ll be rolling something like this out in 2011.”

Mazel Tov

The government reiterated its plans to sell to “the wider investment public” in the U.S., Canada and Australia during its 2011 budget, which was presented to parliament on Nov. 18. Petros Christodoulou, director general of the Greek Debt Management Office in Athens, declined to comment when contacted by e-mail this week.

Israel has raised more than $31 billion by selling bonds to Jewish communities and institutional investors around the world via the Development Corporation for Israel, according to data from the Bank of Israel in Jerusalem. Current sales include 5- year Jubilee Issue bonds paying 2.22 percent a year with the minimum investment of $25,000 and 5-year Mazel Tov bonds paying 1.6 percent a year with a minimum subscription of $100, according to the Development Corporation’s website.

The country benefits from supporters abroad reacting to security threats against the Jewish state, said Joshua Matza, the group’s chief executive officer.

When Iranian President Mahmoud Ahmadinejad “visits the Lebanon border, I can tell you for sure we will sell more bonds,” he said. “Greece doesn’t have the dangers that Israel has. No one in the world has these dangers.”

War Bonds

Diaspora bonds are typically sold to individual investors as opposed to fund managers. They buy them directly from the government agency charged with selling them. The U.S. government sold Liberty Bonds to the public during World War I and Series E bonds in World War II to help finance the war effort.

India’s stock and currency markets slumped in 1998 and its credit rating was cut the same year after the country exploded five nuclear bombs. Locked out of financial markets, India tapped its diaspora, offering expatriates as much as 8 percent interest to raise $4.2 billion.

India has raised more than $11 billion in three separate issuances since 1991, according to a study by Suhas Ketkar, an economics professor at Vanderbilt University in Nashville, Tennessee.

The trick for Greece is to offer high enough yields to assuage investors’ wariness about Greece’s economic state, according to Ratha of the World Bank.

Buying Opportunity

He estimated Greece could raise $10 billion, assuming the government gets the marketing right. If the Greek government were to offer more than 3 percent interest, the bonds could be “very attractive,” he said.

“The global crisis might actually be a good time because if things were going well in international markets and a lot of attractive investment propositions were out there, the diaspora bonds would have to compete,” Ratha said.

Greek 10-year bonds yield 11.44 percent, compared with 8.96 percent before the bailout in May and 6.1 percent in March. Equivalent German bonds yield 2.92 percent, while those of Portugal stand at 5.77 percent. The yield on 10-year Israeli bonds is 4.58 percent, while it’s 8.07 percent for India.

The Greek government is talking to banks and brokers about pricing and how to bring the diaspora bonds to market, Papaconstantinou said in September.

‘Very Distraught’

For now, the EU-led bailout is protecting Greece from having to pay record-high borrowing costs. The program will provide Greece with funding for three years as the country tries to curb a budget shortfall that climbed to 15.4 percent of economic output in 2009, a record for countries using the euro. Greece’s budget woes led to European sovereign debt losses that ultimately engulfed Ireland last month.

Vacratsis, who lived in Greece during World War II, said she’s “very distraught” about the plight of her native country. She said she’s waiting for details of any bond sale to ensure it won’t “line the politicians’ pockets.”

“That’s the fear I would think that most people in the diaspora would have,” said Vacratsis, whose father was an Orthodox priest. “There’s not much trust, let’s put it this way.”

Greece needed a bailout as international investors demanded higher risk premiums to take into account debt that exceeds the size of the country’s economy and tax collection that’s among the worst in the EU. Prime Minister George Papandreou came to power in October 2009, only for his government to find that Greece’s budget deficit was wider than previously reported.

Possible Default

Any sums raised from diaspora bonds will be small relative to the country’s 336 billion euros of debt at the end of September.

“I might love Greece but I am not a fool,” Michael Patmios, 43, a Greek-American, said by e-mail from the U.S. “Greece will default and no amount of sentimentality will stop that from happening. Diaspora bondholders will not be bailed out when Greece defaults, unlike the big banks from Europe.”

A successful diaspora bond sale might help Greece shore up its credit rating, which was cut to junk in June by after S&P two months earlier. The sale would be “credit positive,” though not on its own influence Greece’s rating, Sarah Carlson, an analyst at Moody’s, said in an e-mail on Oct. 14.

Key to the success of the sale will be whether Greece can convince investors the funds won’t just be poured into a black hole, said Ketkar, the economics professor.

Invest in Infrastructure

“The Greeks would probably benefit from showing that the money is going to actual projects, not the bottomless pit of funding the deficit,” Ketkar said by telephone from the U.S. “The most important condition to being successful in issuing diaspora bonds is the marketing.”

Israel has used much of the money raised from its bond sales to invest in roads, trains, factories and ports. Development Corporation for Israel, founded in 1951 to ease the economic problems facing the nascent state, gives potential investors tours of the country to show how their money will be spent, said Uri Cohen, director of the agency.

“They love it and their dollars follow,” he said in an interview from Jerusalem. “You can pay down your debt, but if you show a real program, you will be able to succeed.”

Vacratsis, whose family comes from Thessaly in central Greece, wants to see just that. She said she feels sorry for what she calls the middle class in Greece, as pensions decline, taxes increase and state spending falls as conditions for the EU and IMF rescue.

“I love Greece and I want to only see it go forward and right now it’s taken a big step backwards,” she said.

To contact the reporters on this story: Max Raskin in Tel Aviv at mraskin3@bloomberg.net; Maria Petrakis in Athens at mpetrakis@bloomberg.net

To contact the editor responsible for this story: Rodney Jefferson at r.jefferson@bloomberg.net

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