World Government Bond Forecasts: Greece

Until recently the Greek Bond market was known for its fairly low turnover and lack of liquidity. International investors were reluctant to invest because of structural difficulties in the Greek economy. Although liquidity and size still lag against other major bond markets, the government securities market has improved remarkably over the last five years. A series of reforms recently introduced has accelerated the pace of growth of the Greek Bond market, which is dominated by government issues.

The most noteworthy development in the Greek Drachma Bond market in recent years has been the creation of the secondary market. Activity in the secondary market between banks and other financial institutions is increasing, with more participants added daily from domestic and international markets. However, the Greek corporate debt market is almost nonexistent.

Because of high inflation, Greek interest rates have been the highest in the European Union. High real interest rates, the policy of limited depreciation of the Greek drachma and the tax exempt status of the bonds caused foreign investors to purchase Greek Government issues.

Primary Market

The Greek Treasury during the last decade has issued a variety of instruments to tap specific market segments. Tradeable instruments available to international investors in the Greek drachma bond market are the following:

* Treasury Bills

* Government Bonds

* Foreign Currency Linked Bonds

* Eurobonds

* Marathon Bonds

Treasury Bills

Treasury bills are the primary vehicles used by the Greek government to fund its short-term liabilities. They are the most liquid instruments in the Greek bond market. During 1995 there were 36 T-Bill issues, with a total face value of Dr6,122 billion ($25.8 billion). At the end of 1995 the outstanding amount has reached Dr8,418 billion ($35.5 billion).

Government Bonds

These treasury instruments are issued in three-, five- and seven-year maturities. They are priced on a floating basis at a prearranged premium over the one year T-Bill rate. Since February ’96 the premiums have been assigned as follows: for a 3-year maturity 50bp (previously 100bp), for a 5-year maturity 100bp (150bp) and for a 7-year maturity 150bp (200bp).

The current practice of issuing Government Bonds with a floating rate does not preclude the possibility of future issues with a fixed rate. During 1995 there were 30 Government Bond issues with face value of Dr2,345 billion ($9.89 billion). Outstanding issues at the end of 1995 were Dr12,239 billion ($51.63 billion).

Auction

Government Bonds are issued in the middle or at the end of the month. Treasury bond issues are sold to the public through a competitive bid auction. Auction participants are mainly banks and mutual funds. Brokerage houses, individuals and foreign investors are also able to participate by submitting their bids through local banks. Each participant is allowed to submit a maximum of two competitive bids for every new issue. The Treasury accepts those bids which are greater or equal to the lower acceptable bid. The Treasury usually allocates an additional amount of up to 30% of the new issue using a non-competitive procedure. The announcement of the new issues appears usually one week or less before the auction date. Bids have to be submitted to the Central Bank of Greece no later than 12.00 pm, local time, of the day of the auction. The results are usually announced late in the afternoon of the same day (16.00 -18.00 local time). The Treasury reserves the right to reject any or part of any tender.

Foreign Currency linked Bonds

The last five years the Treasury issued a limited number of foreign currency linked Bonds. The coupon yield for these issues is based on Libor plus a premium. The Treasury has issued dollar, Deutschmark, sterling, Ecu, and yen-denominated bonds. Due to the limited depreciation of the Greek drachma against major currencies the Bank of Greece is not planning any new linked Bond issues in the foreseeable future.

At the end of 1995 the outstanding amount of foreign currency denominated Bonds was Dr1,581 billion ($6.67 billion).

Eurobonds

Currently, the Treasury issues dollar, Deutschmark, sterling, Ecu, French franc, peseta, escudo, drachma and yen-denominated bonds. The Eurobonds carry fixed or floating interest rates. The yield for these issues is determined on Libor plus a premium. Some of the issues feature a call or a put option.

Increased demand for these type of bonds has resulted in narrower spreads considerably in the last few years. For instance, the spread for the latest 7-year Eurobond issue has dropped to around 70bp compared to 120bp two years ago. The main issuers of these bonds are the Bank of Greece, the Greek Treasury and various public corporations (Greek Telecom, Hellenic Railways, Public Power Corporation etc.). At present there are 55 outstanding issues in nine different currencies.

Marathon Bonds

The Marathon Bonds are domestically issued Foreign Bonds by supranational institutions and other financial organizations. These issues are similar to the US Yankee or Japanese Samurai Bonds in the sense that it is referring to non-Greek issuers in the Greek Bond market. The Bonds carry either fixed or floating (Libor plus a premium) interest rate coupons. Issuers have been motivated to enter the market due to profitable swap opportunities. The size of the issues varies between Dr10 billion and Dr15 billion. Supranational issuers are granted tax exemption.

The Marathon market is relatively new. These bonds appeared for the first time in 1994, to boost the development of the Greek economy. The IFC has issued the largest bond issue so far. The size of the issue was Dr100 billion, five times larger than any other previous issue. As of March 1996, outstanding Marathon Bonds amounted to approximately Dr275 billion. Demand for Marathon Bonds is very healthy for both institutional and private investors, since they are the only Greek bonds with a fixed interest rate.

Secondary Market

Since the beginning of 1996, the Hellenic Bankers Association in cooperation with the Central Bank of Greece has made considerable efforts to modernize the operational framework of the primary and secondary Bond market. Efforts are focused to the creation of market makers and the ability to short sell a security. Short selling is not yet allowed.

The Bank of Greece has created a more structure market, to ensure transparency in the secondary market and to create the required “depth”. Furthermore, a market makers’ group was established with a commitment to quote prices for at least three (preferably the most recent) bond or T-Bills issues every business day. The seven-year bonds are the most tradeable instruments in the market. Bond coupons are eligible to be stripped and are traded at a discount. The Greek Foreign Currency Linked Bonds are popular among investors and traded widely. These two reasons accounted for the significant decrease in spreads during the past year.

Further improvements in the secondary market and the increased participation of more investors from both the domestic and international markets should improve liquidity and elevate the Greek Bond market to international status.

Greek drachma bond market instruments

alpha credit bank

To draw on our extensive experience in Greek Bond Market and treasury products, please contact:

Alpha Credit Bank A.E.

Head Office: 40 Stadiou Street, GR 102 52 Athens

Theodore Bergeles, Treasurer

Tel: 301 326 4002

Fax: 301 326 4004

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London Branch: 19/21 Davies Street, London W1Y 1LN

Peter Swinden, Treasurer

Tel: 0171 409 1177

Fax: 0171 629 1948

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