Greece’s return to capital markets: Why not try a diaspora bond first?
Greece’s return to international capital markets during the course of 2014 is currently the talk of town in Athens. Sandwiched between Greece’s six-month EU presidency and reports of a primary budget surplus, whose size appears to be changing on a weekly basis, the objective of returning to capital markets is taking on ever more significance.
Government ministers and financial sector representatives are primarily articulating this course of action. They emphatically proclaim that - after a four-year hiatus - the time has come. In their view Greece’s emerging economic stability and newfound fiscal seriousness are two key policy achievements that pave the way to test foreign investors’ appetite for Greek risk with the issuance of new sovereign debt.
The rhetoric serving to justify such a strategy is further articulated by two additional characteristics. For one, the pronouncements by Prime Minister Antonis Samaras and his Finance Minister Yannis Stournaras voice a sense of entitlement, i.e. wanting to be rewarded for the harsh austerity efforts of the past four years.
Furthermore, the proponents are eager to illustrate that Greece is capable of regaining the trust of international capital markets. After the recent successes of Ireland, Spain and Portugal to issue sovereign debt the Greek finance minister is hoping to jump on the band wagon set in motion by other countries having left behind or seeking to exit the constraints of their memoranda of understanding (MoUs).
In order to facilitate the maiden bond issuance after a four-year absence from the markets, considerations are being drawn up in Athens that include the participation of the European Stability Mechanism (ESM) as a potential backstop guarantor should foreign investors’ demand for such a bond possibly underperform.
If we take the arguments in favour of a bond market return at face value for a moment one aspect in the chain of justification is rather revealing through its complete absence. It appears that nobody in the Finance Ministry or Public Debt Management Agency in Athens is considering the issuance of a “diaspora bond” or a “patriotic bond” as a realistic alternative to the placement of new sovereign debt.
There are various countries in Europe and beyond that issue such targeted bonds. Some of them are even members of the euro area. A diaspora bond issued by a sovereign specifically to its own citizens abroad seeks to tap into their wealth in the adopted countries they have lived and worked for generations.
To illustrate the point, since 1951 Israel has repeatedly issued diaspora bonds, tapping its Jewish community across the globe on an annual basis. A series of governments have used this method to raise nearly 30 billion US dollars. The maturities vary from one to 20 years. The funds are earmarked for specific development projects in the country. They serve to complement public investment priorities in infrastructure, education and the tourism sector.
Italy, a founding member of the single currency, also regularly issues so-called “patriotic bonds.” This form of debt is targeted towards the private retail investor and large domestic institutional buyers of Italian debt. In November 2013 the Italian state successfully placed such a patriotic bond with a total volume of 22 billion euros. Its predecessor bond managed to collect 17 billion euros.
The attraction of a diaspora or patriotic bond rests in a potential win-win proposition for both parties involved. From the supply side, the issuing country can factor into its calculations a patriotic discount in terms of pricing levels, yields and maturities. A stable source of financing can be established – witness Israel and Italy – even if or despite prevailing challenging times for the respective sovereign.
Given the size of Greece’s diaspora communities scattered across the globe, the demand element cannot be underestimated either. Today many Greeks abroad are sending remittances back home through different transmission channels. But they could also invest in a diaspora bond that is properly registered, has professional fund management and is transparent as regards the use of available funds. Surely expressions of Hellenic patriotism and the desire to “do good” in their country of origin are factors which a public debt management agency in Athens could at least test during an international roadshow.
The reputational benefits are equally worth considering. Unlocking the potential for development finance through the successful placement of a Greek diaspora bond would make headline news in Athens and raise considerable attention in Washington, Brussels and Berlin as well as Frankfurt.
So why in its preparations to return to international capital markets is the Greek government not undertaking any efforts in this direction? If one wants to test investors’ interest in Greek debt, why not start by scrutinizing the appetite of its own diaspora or patriotic investors? Reports that the then Finance Minister Giorgos Papaconstantinou considered the issuance of a diaspora bond back in early 2011 are inconclusive. If true this would nevertheless indicate that the option was tabled, but never realized. One wonders why? Did Greece’s international creditors object to the idea?
If countries like India, Sri Lanka and Ethiopia can use such an instrument for large infrastructure projects, what explains Greece’s hesitancy to do the same? The answer surely cannot be that the Greek diaspora communities in the USA, Canada and Australia or those expats with funds parked in Switzerland and Liechtenstein would be uninterested in such a proposition or lack the necessary financial resources.
Considering the challenge of increasing public investment commitments while covering a medium-term funding gap that Greece faces in 2014 and 2015, there is a clear need to identify innovative sources of financing. Instead of exclusively focusing on the one-way street of a return to international capital markets, an alternative strategy whose time has come should be tested. While it is not a panacea, a diaspora bond informs us about commitment.
Launching a diaspora bond first could be a much more convincing sign of regaining trust and confidence but not by focusing primarily on markets. Rather, such a bond would address the most important constituency a government has, namely its own citizens, away from home and willing to contribute.
*Jens Bastian is an independent economic consultant and investment analyst for southeast Europe. From 2011 to 2013 he was a member of the European Commission Task Force for Greece in Athens. He is a regular contributor to The Agora section of Macropolis. Follow Jens on Twitter: @Jens_Bastian