Greece’s return to sovereign debt market a pipe dream

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Despite falling yields on Greek government bonds and renewed interest from international investors, the dire economic outlook and inability to reduce its debt burden means Greece is years away from being able to issue sovereign debt, according to analysts.

Bet you did not expect to read an article about Greece’s road to sovereign debt-issuance redemption so soon.

However, after yields soared as high as 30% in 2012, Greek bonds have been recovering, steadily buoyed by upgrades from the rating agencies, Draghi’s lips and the perception in the market that the immediate danger of default has passed – or if the latter did materialize, it would be the official, rather than private, sector that would shoulder the burden.

This all raises the tantalizing prospect that perhaps, just perhaps, Greek sovereign debt issuance in international markets is not the stuff of eurozone dreams.

Improving sentiment has seen investors returning to the market and, in recent trade, Greek 10-year bonds have been yielding 8% and the 30-year slightly higher, indicating the resumption of normal spread curves.

Until recently, confidence had been so low that the 30-year note was yielding less than the 10-year.

The turnaround has prompted Greek officials to call for a return to the bond market in 2014.

European Central Bank president Mario Draghi
It has been more than three years since Greece’s last auction in March 2010 when it sold €5 billion of seven-year bonds at 3.34%, according to figures from Dealogic.

However, interest is being driven largely by the search for yield and hedge funds. Greece faces a long, uphill struggle to restore it finances to the point where it is able to sell sovereign debt, according to analysts.

And worse still, they warn that an exit from the euro remains a strong possibility.

The level of debt in Greece is still very large relative to the size of the economy and stabilization against the economic backdrop is not in sight, says Gianluca Ziglio, executive director of fixed income research at Sunrise Brokers.

“The first thing it needs to do is to try to stabilize, get positive growth and generate primary surpluses that are consistent with a rapid reduction of debt to GDP over the next four or five years from 180% to about 130%. That’s a massive correction of about €100 billion.

“Even to achieve a much smaller reduction, say €70 billion – assuming that GDP stabilizes – Greece needs to run a 7% extra surplus. It’s going to be extremely difficult to contemplate a return to the market until that is achieved.”

He adds: “I just don’t see it in the medium term. The magnitude is such that not only does it have to go back to being a normal economy, it has to become a super economy.”

Ziglio says market confidence needs to be restored after last year’s debt restructuring – which saw private investors lose 75% of their money – and that Greece needs to get a point of debt sustainability. Until it does, institutional investors will not return and there will be no investment grade from the rating agencies.

“If the debt doesn’t come off, what’s going to happen in 2014 or 2015 when the current funding programmes expire and Greece will need to refinance because the whole point of these programmes is for countries to be able to go back to the capital markets?”

The EU and the IMF’s second economic adjustment programme will see Greece receive financial assistance of €164.5 billion through to the end of 2014, while last year’s private sector involvement deal saw €197 billion of bonds exchanged for bonds with longer maturities.

However, political instability last year saw capital outflows and delays in disbursement of funds from the European Financial Stability Facility, which took such a toll on the economy that the EU and IMF have had to extend the adjustment path by two years.

The primary surplus target for 2014 has been slashed to 1.5% of GDP, with the original 4.5% target pushed back to 2016. A package of measures agreed in November, including cutting the interest rate on loans and giving Greece a further 15 years to repay, is aimed at reducing debt to GDP to 124% by 2020.

The economy, which has contracted by more than 25% since 2008, is mired in deflation and a 27% unemployment rate, while those who are employed are being hit by pay cuts and tax hikes.

The IMF forecasts the economy will shrink a further 4.2% this year but will begin to recover next year when it is expected to post 0.6% GDP growth, reaching 3.3% by 2018.

“The Greeks have managed to improve their fiscal position recently and that’s helped stabilize sentiment, and the economy seems to have reached a floor which has helped Greek financial markets,” says Dario Perkins, director of global economics at Lombard Street Research.

“The market has decided this crisis is over because the social and political uncertainties are beyond the time horizon of many investors. At the moment when you’ve got this global search for yield, people are prepared to take on more risk.

“For me, nothing has really changed. The political situation is still extremely fragile and things could go wrong at any time. I’d be much more nervous about the renewed confidence that people have.”

He warns: “If we still don’t have any kind of proper economic recovery going into early next year, we’d have to be much more worried about Greece leaving the euro.” 

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