You Might Not Find Greece's Next Crisis in the Bond Market

GREECE-EUROPE-MIGRANTS

About 25,000 refugees are currently stranded in Greece, with another 1,000 added each day, Greek government spokeswoman Olga Gerovasili said on Tuesday.

Photographer: Aris Messinis/AFP via Getty Images
  • Country faces more refugees, bailout stalemate and protests
  • Greek bonds are best performers in euro region the past week

If Greece ends up heading into another crisis, don’t rely on an early warning from the nation’s bond market this time.

The country is grappling with an escalating influx of refugees, another deadlock over financing and more political unrest. While the market is high risk and illiquid, its bonds paint a slightly different picture: they’re the best-performers in the euro region over the past week, returning almost 6 percent.

"Greece pretty much sits in no-man’s land," said George Zois, a director of distressed debt at Exotix Partners LLP in London. "There tend to be a few hedge funds that still think it could probably turn out to be one of the best money-making ideas for this year, but they are very much in the minority."

With pressure rising from all sides on Prime Minister Alexis Tsipras’s government, Greece is starting to command more attention a year after a standoff with the rest of the euro region put the country on the brink of exiting the single currency. Europe now risks fraying as Greek highways, recently blocked by farmers protesting against pension changes, fill up with columns of migrants stranded by border closures.

Avoiding Chaos

While Greek bonds and stocks have been among the worst performers in the world in 2016, they rallied recently. The yield on 10-year bonds has slid 180 basis points to 9.77 percent since hitting a six-month high on Feb. 12. The benchmark ASE stock index rallied 13 percent over the past week.

About 25,000 refugees are currently stranded in Greece, with another 1,000 added each day, Greek government spokeswoman Olga Gerovasili said on Tuesday.

Investors also have been largely indifferent as the European Commission and International Monetary Fund split over how to get through the latest review of whether the nation is meeting its bailout conditions.

"The moves that we see reflect broader moves in risk aversion and risk appetite," said Ciaran O’Hagan, a strategist at Societe Generale. "Obviously investors are concerned about the refugee crisis, but how it impacts financial variables is a moot question."

The Germans

German Chancellor Angela Merkel said on Monday that discord over how to handle the refugees threatens the euro. She earlier warned other EU nations against allowing “chaos” to develop in Greece after fighting to keep it in the single currency.

Her finance minister, Wolfgang Schaeuble, hinted at a Group of 20 briefing in Shanghai that Germany may be ready to grant Greece some leeway.

"Greece will probably pass the bailout review as some of the measures required for 2017 and 2018 will be kicked down the road in light of the refugee crisis," said Theodore Pelagidis, a senior fellow at the Brookings Institution.

IMF Questions

A meeting of euro-area finance ministry officials and Greece’s creditor institutions on Monday failed to break the discord on on fiscal, tax and pension reforms needed for Greece to reach a budget target, according to three people with knowledge of the talks. In a Greek television interview, Tsipras pointed the finger at the IMF for the delay, reiterating that creditors first need to reach consensus among themselves.

Greece needs a program that "adds up" and stops the country’s euro membership being questioned down the line, Poul Thomsen, head of the International Monetary Fund’s European department, said in a blog post last month.

Tsipras, 41, needs to get whatever measures are agreed upon through a 300-seat parliament where he has a majority of just three lawmakers. Opinion polls have put the main opposition New Democracy party in front since it elected Kyriakos Mitsotakis as its new leader at the start of the year.

"The baseline scenario is that Syriza party lawmakers will approve pension reform, amid fears of losing power,” said Pelagidis at Brookings. “But in this dense political period, Tsipras’s image has been tarnished and bruised."

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