MacroPolis

The approval by Parliament next week of the measures agreed by the government and the lenders could be a trigger for several positive developments, including a return to international bond markets for Greece.

Should the multi-bill be approved, as expected, the May 22 Eurogroup is due to discuss the fiscal path beyond 2018 and “a credible strategy for ensuring that Greece’s debt is sustainable.”

The ultimate goal for the government is for the Eurogroup to pave the way, via a commitment to make Greece’s debt sustainable, for the inclusion of Greek government bonds (GGBs) in the European Central Bank’s QE programme. In addition, they could also allow the International Monetary Fund to participate in the Greek programme with financing.

Should everything go to plan in the coming weeks, the government is considering testing the bond markets for the first time in three years.

The last time Greece tapped the markets was in 2014, with two syndicated bond issues. The first was in mid-April 2014 with a 3-billion 5-year bond at a coupon of 4.75 percent, which was followed by a second 1.5-billion 3-year issue at a coupon of 3.375 percent in mid-July 2014.

The first transaction exceeded expectations as offers surpassed the 20-billion-euro mark, meaning that the issue was seven times oversubscribed with more than 550 orders from the investment community. Poul Thomsen, IMF’s mission chief at that time, welcomed the issue as a landmark transaction adding that “it is a financial objective of the programme to get Greece back in the markets.”

Unlike the optimism created after the April transaction, the next issue in July fell short of estimates as the total offers reached 3 billion euros, while the coupon stood at the high end of initial estimates.

The Finance Ministry press release after the April transaction indicated strong demand from real-money investors, with foreign investors’ take up at 93 percent. In contrast, the July announcement just noted that investors showed their confidence in the Greek economy.

The last times before the 2014 transactions that Greece tapped markets was in the first quarter of 2010 with an 8-billion-euro 5-year bond issue at a coupon of 6.1 percent in February of that year, followed by a 5-billion 10-year issue at a coupon of 6.25 percent a month later.

New issue

A potential new bond issue could involve the roll-over of the July 2014 bond worth 1.5 billion euros that matures on July 17, coupled with a new bond issue of around 2-3 billion. As mentioned above, key prerequisites for such transaction are a positive assessment of Greece’s debt sustainability coupled with QE eligibility.

The next monetary policy meetings of the ECB’s General Council, which could decide on Greece’s participation in the QE programme, are scheduled for June 8, July 20 and September 7.

A potential global deal at the next Eurogroup on May 22 or even on June 15 along with positive recommendations by the IMF and the ECB could significantly improve investors’ sentiment, which is also needed for a successful bond offering.

As an indication of the positive impact on bond prices from the recent positive news flow, such as the technical agreement clinched on May 2, the 2-year GGB yield fell by almost 200 basis points (bps) from the previous month to 5.6 percent, while the 10-year yield recorded a smaller drop of more than 100 bps well below the 6-percent mark to 5.6 percent.

At the same time buoyed by the review deal the domestic equity market climbed 15.9 percent in the last twelve sessions, while bank stocks soared 36.2 percent. The strong rebound in the stock market was also accompanied by a surge in the daily turnover, which also signals increased investor appetite for Greek assets once confidence resumes.

The announcement of Greece’s eligibility for the QE programme would result in a reduction of 200 bps of the 10-year GGB yields close or even lower of the 5-percent mark from the level of around 7 percent in mid-January, the Bank of Greece (BoG) noted in its annual report on February 24.

This would mainly stem from the improved investor confidence as the markets will discount the positive impact of future transactions on current bond prices, while the execution of future bond transactions would drive GGB yields even lower, the BoG stressed.

It is also worth mentioning that two large Greek corporates, Motor Oil and OPAP tapped markets this year, issuing 5-year bonds with the coupon set at 3.25–3.5 percent.

A clarification on the debt issue will drive the 10-year GGB yield below the 5-percent mark, Energy and Environment Minister Giorgos Stathakis told Capital.gr on Friday. He also hinted that the government has a specific plan to improve the benchmark rates for borrowing from the markets.

On top of reform implementation and meeting fiscal targets, exiting from the bailout programmes ultimately means Greece returning to markets and being refinanced at affordable rates. This requires a significant reduction in the country risk that is incorporated in the current bond prices.

Although we are not there yet, a number of potential positive developments in the near future, mostly related to Greek debt becoming sustainable and programme compliance, could reduce the sovereign risk and therefore signal that recovery is on the way.