The complexities of regaining market access: Could Greece learn from Portugal?

Agora Contributor: Jens Bastian
Photo by Can Esenbel [http://www.mundanepleasure.com/]
Photo by Can Esenbel [http://www.mundanepleasure.com/]

Portugal is trying for the second time in three months to test its capacity to return to international bond markets. Seeking to regain full access to such debt markets is a central policy objective for the government of Prime Minister Pedro Passos Coelho. Greece, Portugal’s eurozone peer and fellow programme country in southeastern Europe, finds itself in a similar position.

In Greece, Prime Minister Antonis Samaras and his government used the inauguration events of the country’s six-month EU presidency in early January to make its mark. The Finance Ministry reminded anyone willing to listen that it is intending to return to international credit markets during the course of this year. Greece was the first euro area member to be priced out of sovereign debt markets almost four years ago.

There are different avenues leading to a country’s return to international bond markets. Portugal’s recent attempt to test investors’ interest in its government bonds took the form of swapping existing debt due in 2014 and 2015 for debt maturating three years later. In December 2013 the Portuguese Treasury successfully exchanged two bonds maturing in 2014 and one in 2015, totalling 6.6 billion euros. The swap extended their maturities into October 2017 and June 2018, respectively. In doing so, Secretary of State for the Treasurey, Isabel Castelo Branco, was able to lower short-term redemption payments by extending their maturity into the medium-term future.

The timing for a second attempt at market entry on the Portuguese side appears well chosen for two rather obvious reasons. On the one hand, Portugal’s 78 billion-euro rescue programme signed in May 2011 with the European Union and the International Monetary Fund (IMF) is fast approaching its expiry date in June 2014. Despite infrequent public speculation in Portugal and among international observers that the country may need a second financial assistance programme, the government has emphatically rejected the need to consider such an option.

On the other hand, yields on Portuguese sovereign debt have declined considerably. The rate on 4.45 percent Portuguese securities maturing in June 2018 dropped to 3.91 per cent on January 8. This represented the lowest level for the benchmark five-year Portuguese note in trading on secondary markets since 2010.

According to the Greek Finance Minister Yannis Stournaras, the target period for a maiden return to debt markets for Greece would be the second half of 2014. Similar to Portugal, Greece’s second Memorandum of Understanding (MoU) with the European part of the troika (the Commission in Brussels and the European Central Bank in Frankfurt) expires in mid-2014. The MoU with Athens’ third international creditor – the IMF – is planned to expire a year later.

In order to cover a funding gap, which is currently projected to reach 11 billion euros for the 2014-15 period, the Greek government wants to avoid having to ask for a third economic adjustment programme, including a financial assistance package with compliance measures and policy conditionality. Instead, one option Stournaras is eyeing to close this fiscal gap is a return to limited sovereign borrowing on international bond markets. A five-year bond issue would appear to be the most likely option.

In light of these recent developments and future possibilities in both countries the question arises of whether Greece could learn from the Portuguese experience? Athens and Lisbon may very well want to establish a hotline on the ABC of how and when to regain market entry.

It is entirely understandable that both countries want to overcome the stigma that was attached to them when the rest of the world was unwilling to lend to them. And they want to own their reform process, including how to finance it, instead of being driven by the conditionality of international creditors.

But the field for distressed sovereigns exiting the shackles of a memorandum could get rather crowded in the course of 2014. Portugal and Greece would also have to reckon with Ireland. The timing of any bond issuance, projected volumes and maturity targets would warrant at least a minimum of institutional coordination among Athens, Lisbon, Dublin, the EU and the ECB. International road shows by these returning sovereigns could become rather busy affairs.

The other issue worth considering is if Portugal’s course of action is really warranted? There are good reasons to formulate some scepticism about the presumed Portuguese ‘success story’ when returning to capital markets. Just consider the following examples in more detail.

·         Since mid-2012 the Portuguese government has repeatedly been forced by the Constitutional Court in Lisbon to make substantial revisions to proposed austerity measures. While these decisions do not impact on the government’s authority to decide on a return to the markets, it does tell us something about the fragile state of budgetary planning in Lisbon and the emergence of a major institutional player to be reckoned with in the coming months.

·         As a recent study from the US-based investment advisor firm Tortus Capital has underlined, Portugal’s gradual opening of the capital market window is by no means assured during the course of 2014. Portugal is currently the only euro area member whose sovereign debt is rated junk and for which the rating outlook is negative at two of the three international credit rating agencies, namely S&P and Fitch. It is noteworthy that such rating agencies continue to classify Portugal’s sovereign debt as below investment grade despite repeated bond swap exercises by the Coelho government.

·         Similar to Greece, Portugal has benefited from the prolongation of loan maturities and the reduction of interest margins on loans disbursed by its international creditors. This has been undertaken with a view to soften the burdens while reinforcing policy compliance. But there are warning signs of underachievement on the horizon. In two key macro-economic indicators Portugal is missing agreed targets. For one this concerns the government deficit (5.5 per cent when inclusive of expenditure for bank recapitalisation) and secondly the debt-to-GDP target (128 per cent end-2013).[†]

This being said, there may be good reason on the part of Greece to take more of a wait and see attitude instead of a premature return to debt markets in 2014. Taping the debt markets later rather than sooner may actually be the better option in terms of sound politics. There is enough unfinished (reform) business in Greece to consider which needs have to be addressed and solved. In my view, this approach should take priority over the urge to claim ‘Mission Accomplished’ for the sake of the symbolic goal of a return to debt markets.

The issues at the cutting edge of the structural reform process currently being implemented and contested in Greece are numerous. Let us consider three such thematic areas:

1.      The outcome of the Bank of Greece’s stress tests on domestic financial institutions, in particular regarding the four largest lenders that were recapitalised in 2013, needs to be taken into consideration. They are accumulating an ever-larger amount of non-performing loans and continue to display a rather fragile depositor basis.

a.       This impacts adversely on their capital ratios and may lead to the identification of additional capital needs in the course of 2014. Such a potential outcome would not be conducive to a sovereign’s attempted return to international bond markets. The proverbial market confidence element is key here.

2.      Any private sector investor would be well advised to look closely at Greece’s capacity to address the dynamics of debt sustainability. The Bank of Greece has projected a ratio of 174 per cent by end-2013; a level previously attained in 2011. Moreover, since 2010 the debt profile of Greece has substantially changed. An unprecedented debt migration from the private to the official sector has taken place, with major implications for the definition of junior and sovereign status for bond holders. Equally, the debt restructuring and debt buy back operations from 2012 continue to leave their mark on many private sector investors.

a.       Their risk appetite for Greek debt may be limited for the time being. Pimco, the world’s largest bond fund, recently announced that it would not return to the Greek market in 2014. In the absence of such key institutional investors it would not be in Greece’s interest that speculative hedge funds become the primary buyers of a new five-year bond.

3.      One of the primary objectives of the Greek government is to return to debt markets in order to regain fiscal sovereignty and thereby decide on its own how to plug any medium-term budget gap. But during the past three years the key policy argument for a return to sound fiscal management in Athens included the broadening of the tax base among the population and increasing the annual level of revenue projected from the privatisation process.

a.       These two goals remain in play. But, as the repeated downward adjustments of anticipated revenue streams from privatisation projects illustrate, underperformance in this area has necessitated substantial policy revisions. Is the planned return to international bond markets a (silent) acknowledgement that other domestic sources of revenue are still not within reach in Greece?

Whatever course of action the authorities in Greece decide to take, the country’s risk profile will remain. This includes the sensitive issue of whether Athens would need the availability of a so-called ‘precautionary credit line’ to facilitate access to financial markets after exiting the European part of the MoU in mid-2014. Ireland, which exited in November 2013, declined to make use of the offer. What Portugal will do remains to be seen.

In any case, the scenarios currently being floated by the Greek authorities include the participation of the European Stability Mechanism (ESM) as a backstop guarantor for a partial return to sovereign debt markets. However, bear in mind that the ESM is already providing official sector financial assistance to Greece in support of its economic adjustment programme. Is there a potential conflict of interest looming here for the ESM in terms of its mandate and resource allocation?

More specifically, if Greece were to issue a five-year bond, one option includes the ESM committing to cover a certain proportion of the issuance. To illustrate, if international investors were to line up to buy 65 percent of the bond, the ESM could then participate by purchasing the outstanding 35 percent in order to guarantee the successful initial sovereign debt placement.

This modus operandi would not be genuine for Greece. If it is politically feasible is another matter. But the possible need to bring the ESM on board informs would-be investors about the existing limitations and dormant risks of a full and convincing debt market re-entry for Greece in the course of 2014.

*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

[†] Both data references are based a presentation by Tortus Capital, ‘Rehabilitating Portugal’, January 2014, New York.

 

3 Comment(s)

  • Posted by: H. Trickler

    @Mr. Tsigantes:

    I will happily answer your question when you have written an answer to my question in this forum dated 11 Oct 2013 17:33
    (http://www.macropolis.gr/?i=portal.en.the-agora.389)

    And please note that here I cited Mr. Jens Bastian.

  • Posted by: Tsigantes

    "There is enough unfinished (reform) business in Greece to consider which needs have to be addressed and solved."

    How Greeks reform their country is for Greeks to decide, not outsiders. It is not difficult to reform Greece. The question is what is meant by "reform"- the so-called Task Force's version (a body that Greeks had no say in appointing, whose choices serve only outside interests and have decimated Greece); or our own?

  • Posted by: H. Trickler

    > "There is enough unfinished (reform) business in Greece to consider which needs have to be addressed and solved."

    Amen, and good luck!

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