Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

(Updated )

Greek bonds have rallied in recent days on reports the International Monetary Fund may agree to participate in the next stage of the country's third bailout.

Grecian Ideals
Optimism for a deal is driving Greek yields towards the lows
Source: Bloomberg

The government has little option to agree to the IMF’s austerity demands. But it would be no more than marriage of convenience for all involved. The consequences for the economy, and Greece's ability to ever service its debt, are likely to be calamitous: GDP shrank 1.2 percent in the last quarter of 2016.

Going Nowhere
Recent economic performance is well below Bank of Greece forecasts
Source: National Statistic Service of Greece

A deal is a means to an end for the Syriza-led government. It has little option than to say what is needed so it can meet the 7 billion euros ($7.5 billion) of debt repayments it needs to by the summer. The European Union wants a smooth run-up to Germany's elections. The IMF would much rather not be involved -- but Germany insists on its presence, even though the EU disagrees with its requirements.

Looming Bill
Greece has more than 7 billion euros of debt repayments due this year
Source: Bloomberg

Yields on Greece's benchmark ten-year bond have fallen 50 basis points in the past week alone and are near their lowest this year. That optimism -- based on hopes the country will both get its bailout back on track and benefit from the European Central Bank’s bond-buying program -- looks misplaced.

Giving Greece access would run contrary to the founding principles of the ECB and would undermine much of the post-crisis rules tightening, so justifying it will require some serious creativity.

Most of the speculation appears to be driven by an unsourced report in Greek newspaper Kathimerini that German Chancellor Angela Merkel was prepared to compromise, though there has never been any subsequent validation. That is a leap of faith too far.

Greece's junk credit rating would automatically exclude it from the quantitative easing program, except for a waiver the ECB issued in June 2016 to help keep the country's banking system afloat. But Greek bonds are still ineligible until the governing council is confident of Greece's debt sustainability -- and that last part relies on the IMF and euro zone finance ministers. So no small hurdle to jump.

And even if the country were included, EU institutions already hold so much Greek debt following its previous bailouts, the ECB would only be able to buy less than 2 billion euros. The central bank can't buy more than a third of the bonds issued by any country, so QE would have to stop within a few months.

The government appears to hope that would provide temporary cover for them to start selling debt again. Deputy Prime Minister Yannis Dragasakis said on March 3 that Greece could hold a "test" auction before the year-end if all goes well. The country issued a 3 billion-euro five-year bond in 2014, but has been frozen out of the markets ever since.

The April 7 meeting of European finance ministers will be the key date. Remarks from German Finance Minister Wolfgang Schaeuble suggest there is little appetite to bend any rules. The European Stability Mechanism, which these days bears responsibility for Greek financing, has made it clear no further measures can be contemplated until the end of the current program in August 2018.

Bond investors are making a big gamble that a compromise will fall perfectly into place, repeating the November 2016 rally. Those hopes were soon dashed.

Wheeling in the ECB would be a major, difficult and controversial policy reversal. Greek bonds are unlikely to be accepted back into the club any time soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(An earlier version of this column was corrected to show in seventh paragraph that Greece's credit rating doesn't automatically make the country's bonds ineligible for QE.)

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net