Greek Return to Bond Market Is Just Start Down Recovery Road

  • Investors see bond issue as first of many to refinance debt
  • Tsipras government sees bond sale as step toward bailout exit

Greece’s much-awaited return to the bond market after a three-year hiatus is far from the end of the road for Europe’s most-indebted nation.

The sale of a new five-year bond on Tuesday was a way for Prime Minister Alexis Tsipras to show that Greece can cut its debt-servicing bill and carve out a path to exit its bailout program. The challenge now for the government is to focus on boosting economic growth and sustain its market access with additional sales across maturities, said Panos Tsakloglou, a professor at the Athens University of Economics and Business, who was a Greek bailout negotiator between 2012 and 2014.

“Greece returns to the state of 2014 after three wasted years of inferior economic conditions; what’s needed now is continuity and consistency,” he said. The government “has to issue more bonds at reasonable rates in the coming months to prove that the country can refinance its debt after the end of the bailout program while, at the same time, create a cash buffer.”

Of the 3 billion euros ($3.5 billion) in bonds sold, just under half was fresh money with the remainder exchanged for older notes maturing in 2019. U.S. investors bought 44 percent of the new bonds, while Greeks took 14 percent. In contrast, Greek investors accounted for 75 percent of the bond-switch.

The outcome “was better than we expected,” Greek Finance Minister Euclid Tsakalotos said in comments broadcast live on state-run ERT TV. “This is not the end. There will be a second and a third” bond sale to ensure the country exits its bailout program in August 2018, he said.

Greece was emboldened to return to the market after euro-area creditors agreed to release 8.5 billion euros in new loans in June. Then, the International Monetary Fund agreed to a new $1.8 billion conditional loan for Greece on Thursday, with disbursement contingent on euro-zone countries providing debt relief. On Friday, S&P Global Ratings raised the country’s sovereign credit-rating outlook to positive from stable.

‘Collision’ Course

“Tsipras has left behind ‘collision economics’ a long time ago, and has apparently decided that the best strategy for re-election in 2019 is to exit the bailout program,” Nicholas Wall, manager at Old Mutual Global Investors, said in e-mailed comments.

“For this, he needs economic growth, access to markets and cooperation with European partners,” Wall said. “A successful Greek exit from the aid program would also be a boon to European policymakers, who have long faced criticism about their approach to the Greek crisis and don’t want to ask their taxpayers for more cash when this bailout package expires next summer.”

Euro-area creditors and the IMF have provided a total of 226 billion euros in bailout funds to keep Greece afloat. The funds have come with demands of austerity measures and structural reforms.

As it works through those actions, the government is planning further bond sales to create conditions for a “clean exit” from the bailout program. If Greece wants to leave the support plan, it needs to be in the markets for at least 12 months, a government official said.

Bodes Well

This week’s bond sale -- which was oversubscribed aided by investors’ quest for yield -- may bode well for future sales.

“It’s fair to say that after this issue, the worst seems to be behind for Greece,” said George Zois, a fixed-income director at Mint Partners in London. “Now they need to keep pushing forward. But it’s still likely to be an arduous process, with external events more likely to put a spanner in the works than an internal derailment."

The country needs to stay the course, Pierre Moscovici, the EU Commissioner for Economic Affairs, said during his visit to Athens on Tuesday. Greece’s return to the markets is “an important first step, ” he said, warning, however, that the government needs to “implement the laws that it passes.” 

Investors will be keeping a close eye on Greece, making it essential that the government “avoid unnecessary frictions with our lenders in upcoming bailout reviews,” Tsakloglou said. “There must be signs of a sustained economic recovery and a growth story that will be able to boost the economy in the medium-and-long term.”

Carsten Hesse, a London-based economist at Berenberg, concurred.

“The Greek government can feel proud to have achieved bond market access again, but it needs to make sure that it continues to implement all the required and demanded structural reforms by the international lenders, otherwise the party mood will be very short-lived," he said.

— With assistance by Stefania Spezzati, and Marcus Bensasson

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