| Greece continues to amaze everyone |
No eurozone sovereign has come further since joining the euro than the Hellenic Republic. When Greece set up a public debt management agency, its fast-improving fundamentals were marred by a large and fragmented national debt. Like Italy before it, Greece managed to turn this into an advantage by maximizing its debt’s liquidity, consolidating a mass of discrete FRNs into a true benchmark curve.
Before accession, its average outstanding issue size was between e2 billion and e3 billion. Now that has grown to between e6 billion and e8 billion. In the same period, Greece has been upgraded no less than five times by the major rating agencies, most recently in November 2002 to A1 from A2 by Moody’s. Bankers point out that it is easier to improve credit standing from a lower base but this does not detract from Greece’s achievement. At the end of 2000, only two Greek bonds were eligible to trade on EuroMTS. Now 11 have attained that status.
All new benchmark deals are syndicated, with the focus on wide international distribution, and Greece is committed to getting them all listed on EuroMTS within a few months of issue. The state is a model of discipline and transparency, with a quarterly issuance calendar and a constant openness with investors about the Greek credit story. Philip Brown, managing director in debt capital markets at Citibank, says: “The virtues of sovereign borrowing involve being a rather unexciting issuer. Predictability, transparency and liquidity are the key issues. The Greek public debt management agency has done a lot to develop these qualities.”
In keeping with tradition, Greece came to market extremely early in 2003 with a highly successful e5 billion benchmark deal, which was more than twice oversubscribed. An unprecedented 68% of allocations went to European investors outside Greece. The deal shows in miniature how far the country has come. When Greece issued a 10-year bond in 2001, its spread was about 55 basis points over Bunds. This year’s deal’s spread at launch was about 29bp, and that has since tightened to 25bp. Its 4.6% coupon is the lowest of any Greek bond at any maturity.
Christoforos Sardelis, director general of the agency, says: “Investors see the convergence in credit quality between Greece and the core states. And with euro yields so low, they are hunting for extra spread. This creates strong demand for peripheral eurozone sovereign paper. We have the highest yield in the Emu, although we sometimes trade through Italy at five years, but our spreads are still lower than some AAA non-eurozone countries such as Denmark and Sweden.”
Brown at Citibank says: “As the most recent euro entrant, Greece has come furthest in terms of spread convergence with both the Bund curve and with swaps. Investors now see Greek bonds as an interest-rate product, being a carry trade among E12 markets. Greece is now a substantial constituent of the euro government bond indices and this has broadened the range of international investors interested in the Greek market.”
Alex Corley-Smith, head of the frequent borrowers origination desk at BNP Paribas, also worked on the latest e5 billion deal. She agrees with Brown on the magnitude of Greece’s progress. “Over the couple of years before it joined Emu, Greece was always a convergence play,” she says. Now it is firmly within the European government bond world, and the book we built shows this – these weren’t convergence accounts. At five years, Greece is trading at a par with AA-rated sovereigns – it’s incredible how much they’ve achieved.”
Investors move from core to periphery
More technical considerations should also mean that demand for Greek paper stays strong. Brown at Citigroup says: “As the number of index-eligible Greek benchmarks grows, so will the country’s presence in indices, which in turn attracts increased demand from index funds. In general, demand from real-money accounts will grow as the country’s debt to GDP ratio improves. And concerns over breaches of the stability and growth pact will push investors from the core out to the periphery in ever greater numbers.” Sardelis is trying to diversify all the time. “Every time we do a syndicated issue, I ask my bookrunners for hints about what types of investors don’t own Greek government paper, and we try to target these, focusing on real money accounts like insurance companies, and pension funds,” he says. Last summer’s Asian roadshow brought in several new accounts, although Sardelis says Asian demand has been crucial for Greece since its EU entry. He proudly talks about how the same handful of central banks from the region have been present in the book for every deal over the past couple of years.
By the end of 2003, Sardelis wants 80% of the Greek national debt to be in the form of new, liquid benchmarks. At the end of 2002, 70% had been achieved. With January’s 10-year benchmark, and the e5 billion, five-year deal that he plans to issue at the start of February, that goal looks achievable. Most of the rest of this year’s total funding requirement – between e27 billion and e28 billion – will be done by tapping existing lines.
More interesting structures could also be in the pipeline, though. “We’ve allocated e2 billion to e3 billion to special or strategic issues this year,” says Sardelis. This could include other currencies, depending on the swapped cost. One possibility is an index-linked bond later in the year. This will depend on whether we think the demand is there but it would be based on eurozone inflation.”
