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MARKETS: After 3 years, Greece is back

26 July, 2017

* Returns to capital markets with EUR 3bn bond sale *

Greece made a successful return to the capital markets on Tuesday, raising EUR 3 bln in its first bond sale for three years, with the government in Athens hailing the auction as a “significant step” towards exiting the country’s third bailout some time next year, news reports said.


 
The deal marks growing confidence in recovery but cannot hide investor ambivalence, the Financial Times reported, saying that the return to the sovereign debt market used “incentives to win over still-hesitant investors … that marked a milestone in the country’s return to economic health.”
Offering a high rate of return, the five-year bond issue was more than twice oversubscribed, with the yield set at 4.6% — showing slightly improved investor confidence since the 2014 issue, where the yield was 4.95%, according to the Associated Press.
The bond issue “laid the foundations for future trades as it weans itself off external aid,” a Reuters report said, quoting a government official as saying that, “(it) reaffirms the positive trajectory of the Greek economy which is making steady steps to exiting crisis and bailout programmes.”
However, 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 FT calculations.
The ambivalent messages sent by investors is symbolic of the left-leaning Syriza 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, the FT added.
PM Alexis Tsipras has won recent plaudits from Brussels for implementing a tough reform programme, allowing the eurozone to release much-needed EUR 8.5 bln in rescue aid only last month. But the IMF has continued to withhold its portion of the bailout amid doubts whether Athens can climb out of its debt hole, which remains the deepest of any EU country.
Demand of EUR 6.5 bln for the bond allowed 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%.
Bankers said they kept the deal size smaller than markets had anticipated in order to achieve a higher price, but Greek officials said they intended to return to the capital markets several times in the coming months.
One investor who holds the existing 2019 bond but chose not to participate in the swap, said that while the “downside is capped” because of Greece’s improving economy and increased fiscal transparency, “we fail to see a lot of meaningful capital appreciation from these levels” of yield.
He cited the “distinct possibility” that another stand-off among Greece’s creditors over debt relief could trigger renewed political uncertainty in the coming year.
The European Central Bank has made debt relief a requirement for Greece to be included in its EUR 60 bln-a-month bond buying plan, a move that would significantly buoy the market for Greek sovereign bonds.
Although the IMF remains sceptical of Tsipras’ performance, eurozone officials have rallied around the far-left prime minister.
Pierre Moscovici, the European Commission’s economic chief travelled to Athens on Tuesday to lend his support to Tsipras’ efforts and called it “another positive signal of trust in the Greek economy”.
“Let’s prepare the full return to markets in summer 2018!” Moscovici wrote on Twitter.
Investors noted that while the auction was a sign of increasing confidence in Athens among investors, the sale also underlined how record record-low interest rates across much of the developed world were forcing them to hunt for yield by turning to borrowers once seen as pariahs.
Argentina was able to issue $2.75 bln of 100-year bonds at a yield of about 8% last month, despite its history of defaults.
Portugal and Ireland both left a considerably longer gap between their first return to the capital markets and graduating from their bailout programmes, raising questions about whether Athens will be ready to exit by next August.
Earlier this month, Greek central bank governor Yannis Stournaras said it was “a bit early” to tap the capital markets, urging the government instead to focus on “two or three emblematic privatisations”.
Finance Minister Euclid Tsakalotos called the result satisfactory, and added that Greece would proceed with further bond issues before the end of its bailout program in little over a year, the Associated Press reported.
“I think what’s important is the quality and number of investors who showed interest in this issue,” he said. A government announcement said most of the buyers were global institutional investors and not speculative traders looking for a quick profit.
Though the country’s stock of debt remains very high at around 175% of annual GDP, the budget is much improved and most forecasters predict an uptick in growth.
Greece lost market access in 2010 when its credit rating was downgraded to ‘junk’ following revelations that key data on debts had been under-reported.
The country was kept afloat by three international bailouts, provided in return for deep spending cuts and wide-ranging economic reforms.
Greece had only tapped markets once previously since taking its first bailout, issuing a five-year bond in 2014. Tuesday’s bond issue is part of a “switch and tender offer”, whereby holders of the previous bond, which matures in 2019, are asked to switch their bonds for cash.
On Friday, ratings agency Standard & Poor’s raised its outlook for Greece from ‘stable’ to ‘positive,’ encouraged by a recent round of cost-cutting reforms and an expected return to growth this year, although it did not upgrade its credit rating on the country, leaving it at the junk status of B-.
Goldman Sachs, Citi, Deutsche Bank, HSBC, BNP Paribas, and Bank of America Merrill Lynch managed the deal.
Fresh doubts over the bond issue were raised in recent weeks amid reports that Greece had breached a debt ceiling of around EUR 320 bln set by the IMF.
Investors who held the 2014 bonds included Greek lenders Eurobank, Piraeus and Attica, as well as Deutsche Bank, according to data from Bloomberg.