GREECE: Return to capital markets is no cause for celebration

10 August, 2017 | Posted By: Costis Stambolis

 * IMF doubts Athens can manage debt mountain *

By Costis Stambolis

Two weeks ago, Greece made an unexpected move and returned to the capital markets with a 3 bln euro bond sale of which half came from existing investors who swapped their holdings of debt maturing in 2019.

Alexis Tsipras, Greece’s prime minister who nearly led his country out of the eurozone two years ago, hailed the auction as a “significant step” towards exiting Athens’ third bailout in mid-2018. But about half the five-year bond’s buyers were owners of existing Greek debt maturing in 2019 who were enticed to swap their holdings by being paid an extra EUR 40 mln by the Greek government to make the exchange, according to Financial Times calculations.
“The ambivalent messages sent by investors is symbolic of the Tsipras government’s mixed success in shaking off the damage done by its 2015 bailout brinkmanship that spooked investors and eurozone officials, ultimately forcing the closure of Greek banks for three weeks,” observed the newspaper.
Nevertheless, demand for the bond reached EUR 6.5 bln which did allow Greece and its bankers to price the yield on the bond below the initial guidance of 4.875%, at 4.625, which was also well below the yield on the five-year bond sold in 2014, at 4.9%. According to banking sources in Athens, the deal size was kept smaller than markets had anticipated in order to achieve a higher price, as Greek officials said they intended to return “soon” to the capital markets in the coming months.
It is no coincidence that that the Greek government’s decision to tap the international capital markets came just four weeks after it had successfully concluded the second assessment of its latest EUR 85 bln bailout programme agreed with the EU-IMF lenders in July 2015.

IMF doubts Athens can manage debt mountain

Tsipras has apparently won Brussels’ support, if not admiration, for implementing a tough reform programme which allowed the eurozone to release some EUR 8.5 bln in rescue aid which allowed Greece to meet bond repayment commitments to ECB and elsewhere. However, the IMF has decided to withhold its portion of the bailout funds citing doubts that Athens can in the long term manage its debt mountain, the highest of any EU country.
 The assessment which was concluded on June 15, dragged over a ten-month period, well beyond the date it was supposed to conclude, with the Greek government unable or unwilling to implement a series of financial measures and vital structural reforms deemed necessary to transform the country’s stagnant economy. An economy which is still grossly dependent on a bloated public sector which prevents new business development and the employment opportunities which come with it.
The trouble is that much depends on the country implementing reforms, note economic observers in Athens. Dozens of the 140 measures agreed to are in various stages of application and more than 100 additional actions are still needed to access the remaining EUR 26.9 bln in funds before the current bailout programme ends in August 2018.
While the evidence of belt-tightening is everywhere in Greece, from falling incomes to rising poverty, the country has less to show in terms of structural overhauls. Creditor demands for more measures threaten to become politically explosive as Greek citizens and businesses count the cost of the financial crisis that has thrown their lives into turmoil over the last seven years.
Over the years, creditors have imposed reforms that have affected the daily lives of Greeks, from requiring receipts for tax breaks and e-prescriptions for patients to prevent abuse, to pension payout cuts of as much as 50%. While Greece’s record of implementing reforms hasn’t won it any kudos, it is now hitting against even more challenging structural measures aimed at profoundly changing entrenched habits.
The real problem is with reforms like fixing the tax system and the judiciary that require “long implementation,” said Gerassimos Moschonas, an associate professor of comparative politics at Panteion University in Athens. Belt-tightening measures have had a dramatic effect on life, making further long-lasting reforms difficult, he said. According to latest statistics the income of an average household has decreased at least 40% during the crisis, while poverty risk has increased 35.6%, following substantial pension cuts and over-taxation.
Since Greece became the epicentre of the European debt crisis in 2010, the country has agreed to a series of austerity measures to restructure its economy, which has shrunk at least 27% over the period. In exchange, euro-area creditors and the IMF have provided more than EUR 260 bln in bailout funds to keep Greece afloat.

Progress far short of what is needed

“Progress with structural reforms has fallen far short of what is needed to allow Greece to succeed in the euro zone, but the programme foresees some intensification of efforts,” the IMF said in its latest report on July 20.
“Greece has struggled with reform implementation,” the IMF report said. While labour market changes have been implemented, liberalising product markets and regulated professions have suffered from “weak implementation,” it said. Delays in implementing what has been agreed prolongs uncertainty and is responsible for Greece losing opportunities.
Having been shut out of markets for the last three years, Greece’s re-entry into the capital markets, albeit with rather unfavourable terms compared to current European bond issues, some market participants have hailed the move as a litmus test for investors’ faith in the future of the eurozone. The question naturally arises as to what is the case for buying bonds of an over-indebted country, with a EUR 320 bln debt pile, still struggling to escape from a 7-year-old recession and an economy which, under a radical left government, does not inspire much confidence?
The answer appears to lie more in politics than economies, as several commentators point out. Investors buying back into Greece appear convinced that the country will finally be awarded the much coveted, by the SYRIZA government, of a huge debt restructuring, which its creditors (notably the IMF) have long been calling for. However, such a ground-breaking move can only take place when Greece’s lenders will examine the state of Greece’s finances and its 180% of debt to GDP when its bailout officially expires in August 2018.
A key factor which helped tip investors’ confidence in getting more exposure to hazard ridden Greek debt has apparently nothing to do with Greece but is more related to changing market sentiment towards Europe.
“Markets have been electrified by central banks in recent years, bringing down borrowing costs for governments who have locked in easy financial conditions. Even former sovereign debt pariah Argentina is managing to issue 100-year bonds” notet the FT in its Brussels Briefing.

No cause for celebration

With the old American saying, “even turkeys fly in a strong wind”, Professor of Economics Nicholas Economides described Greece’s latest foray into the international markets.
Talking to the “Greek Reporter”, Economides said that there is no cause for celebration as Greek banks exchanged old bonds for half of the new issue, meaning that Greece raised only EUR 1.5 bln in new money at about 4.6%.
“The tiny amount of the issue, the high coupon (since Greece pays 1% for EU loans), and the reluctance of the Greek government to implement structural reforms, result in no clear path for Greece at the end of the EU programme in mid-2018,” he said.
Economides, of New York University’s prestigious Stern School of Economics, is an internationally recognised academic authority on economics and has advised the US Federal Trade Commission, the governments of Greece, Ireland, New Zealand and Portugal, the Attorney General of New York State and major private corporations.
Economides insists that the bond issue offers no clear path for Greece to reach the financial markets after the end of the programme by mid-2018. And this is, he said, for two main reasons.
Firstly, “it’s extremely small.” This is a 3 billion issue out of which 1.5 billion will go towards the exchange of old bonds held by Greek banks. “Essentially the net amount that the Greek government borrowed was only 1.5 billion.”
Secondly, “borrowing was not cheap,” Economides said. He explained that Greece managed to get loans from the European Union at an interest rate of about 1%, while this was about 4.6%.
Many investors tend to agree with Economides saying that the Greek loan is so small it does not matter that it is expensive, but if Greece were to go out in the markets by the end of 2018 paying the same interest of 4.6%, this would be completely irresponsible, since the Greek debt is completely unsustainable and now we are simply adding more to that debt.

Need for structural reforms

Asked whether he agrees that Greece’s return to the markets was at least a psychological boost for the crisis-ridden country, Economides said it depends who you ask.
“A person on the street may think that the government achieved a victory, but one focuses on Greece’s goal to survive after the middle of 2018, including of what needs to be done in order to get there, this does not really make a difference,” he said.
“What would make a difference is if Greece undertook the necessary structural reforms, proceeded with privatisations and implemented all the remaining parts of the programme, so it can return from a strong position to the markets in 2018,” he added. What is remarkable is that politicians like Alexis Tsipras and Panos Kammenos, who a few years ago were accusing the previous Greek administrations of being traitors, are now trying to do the same celebrating the return to the markets, Economides concluded.

Costis Stambolis is a Financial Mirror correspondent, based in Athens.