Yield on 10-year bond auctioned (Oct. 2019)
Greek government 2019 bond issuance (Nov. 2019)
Moody’s B1 stable, S&P BB- positive, Fitch BB positive, DBRS BB low (Feb. 2020)
Weighted average maturity of Greek debt (Sept. 2019)
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The life support system has been packed up and put away; Greece is on its feet again.
After a 10-year hiatus, the country has returned to international capital markets. Apart from limited forays in 2014 and 2017, Greece had been unable to raise money from bond sales since 2010. But recently that changed.
In the first few months of 2019, Greece completed its first two bond issues since exiting the country’s bailout in August 2018. Both were well received, boosting hopes that Athens could keep tapping capital markets for the remainder of the year.
In January 2019, a 5-year bond sale raised €2.5 billion in what was seen as a small but significant step for the country. Demand was strong, and the bond yielded a competitive 3.6%.
In March of 2019, Athens made a bigger move to test investor appetite when it sold its first 10-year bond in nine years. And it went well. Greece raised an additional €2.5 billion at a reoffer yield of 3.9%.
Finance Minister Christos Staikouras says measures have been taken to restart the real economy, attract investments, and fuel future growth.
Then in July, shortly after the change of government following the country’s national elections, Greece went on to sell a 7-year bond at a reoffer yield of 1.9%. The wide drop seen in the yield curve was generally perceived as a vote of confidence in Greece’s growth prospects.
Greece tapped the market for €2.5 billion at a low yield of 1.9%. That falls below the expected 2.1% rate many experts had expected the bond to be priced at.
The sale was oversubscribed five times and attracted significant interest from long-term investors, accounting for the dropped margin.
This money, government officials say, will be used to buy back some of Greece’s debt at an improved rate, thereby creating savings for the country and helping make its long-term debt more sustainable.
Finance Minister Christos Staikouras described the bond auction as an indication that Greece is returning to normal.“One of the basic conditions so that the Greek economy can revert to normality is the systematic, good-quality, and low-cost financing of the country by the international markets,” Staikouras said. “The 7-year bond issue is seen as particularly successful as it is heading in that direction,” he added.
The take on the sale also showed that the profile of investors buying Greek bonds is now adopting a more long-term view of the country. Hedge funds have been replaced by more steady government bond investors, such as European asset managers and pension funds.
This was affirmed in the October 2019 sale when Greece sold an additional €1.5 billion of the March 10-year issue. The reoffer yield, however, was a demonstrably lower 1.5%.
And in January 2020, following an upgrade of Greece’s rating by credit ratings agency Fitch to BB – two notches away from investment grade – Athens issued its longest-dated bond since the financial crisis. The 15-year bond sale was received by investors with the highest level of demand since its return to the international bond market in 2017, with calls for the €2.5 billion bond exceeding €18.8 billion.
Yields on Greece’s 10-year bond reached a new record low in February, falling to 0.9%.
It wasn’t too long ago, though, that investors refused to touch Greek government paper. Athens essentially lost access to bond markets in 2010 when the country plunged into one of Europe’s worst economic crises in modern times. Investors were scared off by the country’s huge debt pile and ballooning trade and fiscal deficits. This sent Athens scurrying for rescue aid in May 2010 – the first of three bailout packages that totalled some €290 billion.
Fast forward to August 2018 and Greece exits the rescue programs. Years of brutal austerity have created impressive fiscal surpluses with budget figures that are better than many other crisis-hit eurozone countries.
According to the International Monetary Fund (IMF), Greece’s primary fiscal surplus before interest and debt payments was 4.1% in 2017 versus 3.8% in 2018, marking the third year in a row of target beating surpluses.
Greece’s outlook is the best it’s been for a long time. Investment bank UBS pointed out in a recent note that Greece’s economy has made many steps in comparison with the recent past, when in 2015 Athens failed to repay an instalment to the IMF on time. Since then, adds UBS, unemployment has fallen to 18% from 28%, and the economy has rebounded with exports moving steadily higher.
“Greek government bonds have produced satisfactory returns in the current year,” says Mark Haefele Chief Investment Officer at UBS Global Wealth Management. UBS considers that both the general political climate along with the large cash buffer will play an important role of stability in the market, adds Haefele.
The economy has been growing steadily for the last 11 quarters and becoming more export-oriented. Jobs are being created, while key economic sentiment indices have improved. Yields on Greek government bonds have also fallen sharply.
Bonds have an inverse relationship to interest rates – when bond prices increase, yields drop. In November, the yield on Greece’s 10-year bond fell to a low of 1.18%.
Greek bonds are also benefiting from improved economic conditions in Europe and a global hunt for returns amid vanishing yields on higher-rated debt.
“Recent developments in the bond markets have been particularly encouraging, with a significant drop in bond yields,” says Bank of Greece Governor Yannis Stournaras.The improved outlook, combined with a debt relief deal Greece reached with creditors in June 2018, has prompted a slew of upgrades on Greek debt by credit rating agencies. In March 2019, Moody’s improved its rating on Greece by two notches, from B3 to B1, citing the reforms undertaken and a growing economy.
“The reform programme appears firmly entrenched, and reforms implemented are starting to bear fruit. A strengthening economy in conjunction with creditor surveillance should further reduce the risk of reform reversal. The track record of strong fiscal performance is now firmly established and is likely to be sustained, as most of the fiscal improvement is due to structural measures,” says Moody’s.
“Public debt sustainability is materially enhanced over the medium term by June 2018’s debt relief package. The sovereign has successfully re-established market-based funding, supported by a very large cash cushion and strong creditor support,” added the report.
The debt relief package pushed back the repayment of €96 billion in bailout loans, about 40% of the total that Greece needs to repay the eurozone over the coming decades, by 10 years. The earliest repayment deadlines have shifted from 2023 to 2033.
The plan also included increasing the size of Greece’s final instalment of bailout money to help build up cash reserves that can sustain it over the months to come, in case it can’t raise financing from the markets. This helped provide the country with a cash buffer of around €35 billion.
Greece’s liquidity remains sufficient to cover financing needs for more than two years, even without new issuances. Given the limited financing needs in 2020 and 2021, the estimated reserves could cover the state’s debt-financing needs well into 2022.
“Greece has one of the most advantageous debt profiles of all our rated sovereigns, in terms of maturity and average interest costs, despite the large government debt,” according to Standard and Poors (S&P). The agency issued a B+ rating to Greece, with a positive outlook.
All this has helped secure Greece’s debt sustainability for some time to come, but worries remain. Despite its recent two-notch upgrade, Moody’s still ranks Greece five notches below investment grade.
“Greek bonds continue to be vulnerable,” says Haefele. “They continue to be influenced by global uncertainty and monetary policy, along with political risks in Europe,” he adds.
And in April 2019, S&P was widely expected to further upgrade the country, but refrained from doing so citing the risk of Greece backtracking on reforms and uncertainties from the international environment.
For one thing, Greece’s bonds are illiquid, remain in junk status, and are highly exposed to global market volatility. At the same time, bad loans held by banks continue to raise concerns about the economy’s ability to grow in the short to medium term.
Additionally, Greek bonds remain ineligible for the European Central Bank’s quantitative easing (QE) programme that would have helped strengthen economic activity and further improve the credit standing of Greek bonds.
Creditors have welcomed Greece’s reforms drive under the ruling conservatives but add that Athens must stick to its fiscal commitments.
And, over the long term, Greece still has a mountain of debt to contend with, something that will keep borrowing costs for both the public and private sectors relatively high and place a lid on broader investment activity.
In 2018, Greece’s debt stood at 183.3% of gross domestic product (GDP). This figure is expected to fall, but at a slow pace. Forecasts show that debt will have dropped to 174.2% of GDP for 2019 before slipping to 167.3% in 2020 and 160.9% of GDP in 2021.
The solution, say experts, is for Greece to keep pushing ahead with its economic overhauls. “For now, it’s important for Greece to aim for an investment grade rating,” says Nichola James, Co-Head of Global Sovereign Ratings at DBRS Morningstar. Their current rating of the country is BB (low) with a positive trend. “It will be helpful for Greece to continue with current policies and, in particular, to generate primary fiscal surpluses,” she adds.
Stournaras says, that in order for Greece to secure a permanent return to the international market on sustainable terms, there must be a continuation and completion of reforms.
“In this context, a top priority must be given to reforms that enhance public administration efficiency, legal certainty, especially in land use, and the faster delivery of justice,” he says.
One thing though is for sure: after the latest bond auctions, Greece appears to be in a better position to fund itself.
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