Greece prepares for end of bailout era with comeback bond

Angela Merkel is unwilling to make concessions to Greece ahead of Germany's general elections. [European Union]

Greece sold debt to private investors for the first time in three years on Tuesday (25 July), a significant step towards gaining financial independence and exiting its third international bailout next year.

The deal comes a month after euro zone finance ministers signed off on a new loan and sketched out measures to chip away at Greece’s debt mountain after the current bailout finishes in August 2018.

Athens says Tuesday’s sale of a new five-year bond is a test run to ensure Greece can rely on market funding next year. A tender of old bonds run alongside the sale will help lower its repayments in the years following its bailout exit.

The deal did not attract as much demand as the country’s brief foray into markets in 2014, but Athens looked to have paid less to borrow the same amount, 3 billion euros.

“The return of Greece to the capital markets was and is the goal of the ongoing adjustment programme. We therefore welcome the fact that Greece has the chance to return to the market on a step-by-step basis,” a spokeswoman for the finance ministry in Germany, Europe’s biggest economy, said.

Greece breaks three-year isolation and returns to debt markets

After three years of “exile”, Greece will return on Monday (24 July) to the international debt markets, testing the waters to see if it can begin to wean itself off bailout loans after tough reforms.

Analysts said some investors may be put off Greek government bonds because they have the lowest credit rating in the euro zone and are not being eligible for purchase by the European Central Bank under its quantitative easing scheme.

When Greece sold €3 billion of five-year bonds with a coupon of 4.75% in 2014, demand reached over €20 billion from 600 investors.

On Tuesday, Thomson Reuters’ IFR reported over €6.5 billion euros of orders had been placed, and that a 3 billion euro bond would be priced later in the day at a yield of 4.625% and a likely coupon of 4.375%.

Greece’s comeback has been timed to take advantage of its borrowing costs hitting seven-year lows.

A treasurer at one of Greece’s big banks, who wished to remain anonymous, told Reuters that he expected a large chunk of demand for the bond came from domestic banks and pension funds.

He added that the deal would also open the way for Greek banks to borrow in capital markets.

Athens lost market access shortly after it sold bonds in 2014 because its newly-elected leftist government quarrelled with creditors over debt relief.

Some investors may have been put off by that experience, analysts said, especially as there are still lingering concerns around Greece’s debt mountain which stands at 180 percent of economic output.

“Given Greece’s fundamentals, the problem with this bond sale is that it fuels speculation about investor willingness to lend to an almost insolvent country,” said ABN AMRO senior fixed income analyst Kim Liu.

“Regardless of the success of the deal, debt-to-GDP levels of Greece will still be at high levels.”

But Europe’s economics commissioner, Pierre Moscovici, said on Tuesday he was confident Greece was “turning a page” from its economic crisis.

The bond sale is also emblematic of the recovery of the euro zone as a whole, coming some five years after European Central Bank President Mario Draghi brought the bloc back from the brink of splintering with a pledge to do “whatever it takes”.

The International Monetary Fund, which has lent financial support to Greece alongside the European Union and the ECB, upgraded its 2017 gross domestic product (GDP) growth projection for the euro zone and pointed to “solid momentum”.

“We believe that changes in the European political landscape, together with recent strong economic data, mean the bond should perform well,” said Nicholas Wall a portfolio manager at Old Mutual Global Investors.

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