Greece and the Bond Market. Friends Reunited?
Greece is considering tapping the capital markets for the first time in three years. Let's hope its second attempt to regain market access goes more smoothly for investors than its first.
A bond sale in July or September is being considered -- if a deal on debt relief is reached, and the European Central Bank adds Greek debt to the shopping list of securities it can buy through its quantitative easing program, according to the Wall Street Journal. The news comes as the U.S. presses European officials to ease Greece's debt burden at informal talks during the Group of Seven gathering currently taking place in Italy.
Investors can be forgiven if they feel a sense of déjà vu.
In April 2014, Greece sold 3 billion euros ($3.3 billion) of 4.75 percent bonds repayable in 2019 in its first issue for almost four years. The country had sought to raise 2.5 billion euros; orders from more than 550 investors, though, exceeded 20 billion euros, and, five months later, the bond was increased by a further 1 billion euros. The then Prime Minister Antonis Samaras called the sale "one more decisive step toward exiting the crisis."
Except … it turned out Greece was about to get worse, not better.
The day after the sale, the price of the bonds slipped by a bit more than half a point. By the end of the year, they'd lost almost 20 percent of their value. And by the middle of 2015, they slumped to as low as 40 percent of face value as the government was forced to introduce capital controls in an effort to stanch the flood of money leaving the country's banking system.
The bond price recovered as the Greek government dropped its defiance against the terms demanded by its lenders, implemented pension and labor market reforms and accelerated the sale of government assets.
This positive loop can be sustained if there is further progress at this weekend's meeting of G7 finance ministers and central bankers in Bari, Italy. The infighting between the Troika of the International Monetary Fund, European Central Bank and European Union has calmed. If steps towards an overall Greek debt relief deal can be made -- then the magic words of debt sustainability can become reality rather than fantasy.
Investors are hoping that the European Stability Mechanism, the EU's bailout mechanism, replaces some of the IMF's existing loans to Greece. The new ESM loans can be on much longer maturities and at substantially lower interest rates -- which all helps Greece to meet its financing goals.
Once Greece receives the next tranche of the bailout, it can then pay back the 6 billion euros of government bonds that mature in July. The next step will be for the government to issue debt on a stand-alone basis. There should be plenty of domestic interest once those bonds are repaid. And this should help to persuade the ECB to allow Greece back into the Public Sector Purchase Program.
The ECB helped in June last year by reinstating a waiver of its minimum credit requirements that allowed Greek bonds to be used as collateral, and it deliberately left open the door for entry into the PSPP at a future date.
Investors look hopeful that, with policy makers determined to avoid any conflagrations ahead of the German elections in September, Greece now has the opportunity to take a big step in consigning its crisis to the past.
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