Beware a heady bond market rush in Athens

Anybody – whether householder, businessman or government debt manager – who has not taken advantage of historically-low interest rates to raise capital or refinance borrowings may have squandered a never-to-be-repeated opportunity. Greece does not want to look the fool.


The country’s return to international bond markets shows a determination to act again like a normal, rational-thinking European state. Greece came close to economic collapse, and defaulted in 2012.

But its earlier-than-expected decision to raise perhaps €2bn or €3bn in five-year bonds is not necessarily something to cheer. Instead, the strong demand for Greek debt highlights the frothy conditions in credit markets – and how they are masking deep underlying problems in economies and financial systems.


From Athens’ point of view, Thursday’s move makes a lot of sense. Two years is a not untypical wait after a default before rebuilding relations with international investors, and the timing looks propitious. Government borrowing costs have tumbled across the eurozone with yields, which move inversely with prices, falling further after last week’s hints of imminent “quantitative easing” by the European Central Bank. Wait any longer, and it may have to pay more.








The urgent wish is that a successful pilot Greek bond market issue boosts confidence, highlights impressive progress in reforming public finances and encourages further foreign investment. Not uncoincidentally it could rally support for Antonis Samaras, prime minister, ahead of May’s European elections.


For adventurous investors, buying Greek bonds also makes sense. Even if the yield falls below the target of around 5 per cent, it will look attractive compared with alternatives.


Although not strictly comparable, yields on European speculative-grade, or “junk”, bonds have dropped below 3.5 per cent, according to Barclays’ indices – lower than on US junk bonds. The spreads over yields on ultra-safe German Bunds have not been lower since the pre-2007 boom.


Buying Greek government bonds, however, is not the same as investing in other western European sovereigns. Greece is categorised formally as an emerging market, and this is fitting given its need to build a record of stable governments and financial as well as social stability.







Ahead of Thursday’s book building, the signs were that conservative, northern European “real money” investors would hold back. “You will always find fast money accounts willing to take the risk, without paying over the odds,” says Gilles Moec, European economist at Deutsche Bank. “But can you build a stable investor base?”




Inflows into Greek bonds may prove fickle. Wait for the next bout of investor nervousness and yields could quickly rise. The trigger could be political tensions in Athens – the bond launch coincided with a nationwide anti-austerity strike. Or it could be stronger than expected polling in next month’s European elections by anti-euro and nationalist political parties – or a global sell-off as the US Federal Reserve moves towards higher interest rates.




In a tougher trading environment, Greece may compare less favourably with other emerging markets. Even after the 2012 restructuring, its public sector debt to gross domestic product ratio – at roughly 175 per cent – remains perilously high. Brazil and South Africa, which were buffeted by the recent emerging market turmoil, have ratios of 67 per cent and 47 per cent.




Whereas other European countries can blame banks, overheating property or credit markets for the crises of the past seven years, Greece’s woes were the clear result of out-of-control public borrowing in a low interest rate environment.




Greece’s finances look more sustainable now it is running a primary budget surplus, before interest payments. Moreover, its 2010 rescue left European Union partners owning most of its debt and immediate servicing costs are low. But this week’s bond offer is not about reducing further its borrowing costs; the average interest rate it pays on official loans is slightly below 2 per cent. It is about proving that Greece has broken out of crisis mode – and giving Athens more flexibility over its finances.




This bond issue is just a modest first step. The danger, however, is that a rush of capital market success distracts from essential reforms such as overhauling a bloated public sector, implementing a meaningful privatisation programme and improving tax collection – building an efficient advanced economy, in other words. I have got into trouble before for suggesting Greece’s return to debt markets is like giving an alcoholic a bottle of Ouzo. But beware a heady feeling in Athens.







Ralph Atkins







Fonte: FT