Bond Swap

A Turning Point for Greece

Look at how the country's bonds are performing without the ECB's help.
Photographer: Kostas Tsironis

Greece is taking a step closer to get the respect it deserves from Europe.

Yields on the country's government bonds, which have already taken great strides lower this year, hit a new low last week on news the government is preparing a major debt swap. The exercise, first reported by Bloomberg News, should allow Greece to sell bonds in future -- and help end its dependence on the largess of its main creditors.

New Greek Five-Year

Yields have dropped sharply on expectations that a liquid yield curve will be constructed

Source: Bloomberg

It comes after Europe's peripheral debt markets all made impressive gains in recent months. Spreads on Spanish, Italian and Portuguese bonds have all tightening against their German equivalents.

Peripheral Catch-up

Greece and Portugal have gained substantial ground on their larger Eurozone peers

Source: Bloomberg

The European Central Bank's gentle tapering its quantitative easing program has reassured investors that the buyer-of-last-resort won't disappear soon. That's helped Portuguese yields to drop by about half in the past six months to trade less than 30 basis points above Italy.

Greece has performed even better -- despite the fact its bonds still don't figure in the ECB's Public Sector Purchasing Program. While they are technically eligible, the ECB's governing council still has to decide that it's confident that Greece's debt load is sustainable. Letting Greece into the program would put the country back in the euro zone fold.

Success in the next round of talks with creditors, early in 2018, should finally provide the necessary conditions. The IMF is no longer the barrier to progress it was: It stepped out of the way to allow Greece to increase its debt-load in July. It also softened its requirements on stress tests and bank asset reviews. Domestic politics are also less of an issue. Elections aren't due for two years, and the ruling Syriza party's ratings in the polls are lifting as the economy improves.

Mind the Gap

Yields on Greek government bonds have dropped across the curve this year

Source: Bloomberg

Dotted lines represent gaps in available maturities

In the meantime, it makes sense for Greece to establish a simpler yield curve, with larger and more liquid benchmarks. That ought to attract more investors back to what is at present a backwater. That will be of importance not only to the ECB, but most importantly, when it comes to raising new money, something Greece surely needs to do.

Greece hopes to raise at least 6 billion euros to establish a capital buffer for when it falls out of the formal protection of its bailout next year. If the bond swap is a success, expect it to be followed by another fundraising, creditors permitting.

2017 has been a watershed for the euro zone's peripheral countries. Greece will be hoping 2018 will see a permanent transformation from being a semi-detached basket case into an integral member of the European project.

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

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