Greece Eyes Bond Sale Amid Optimism Over Debt Deal
By Nektaria Stamouli and Christopher Whittall
ATHENS--As Greek assets rally on optimism of a deal to restructure the country's crushing debt, Greek government officials are planning a bond issue--the first by the country in three years--possibly as soon as July or September.
Earlier this month, Athens reached a deal with international creditors on fresh austerity measures that would unlock the next payment in its EUR86 billion bailout program ($93.48 billion).
But the bigger goal is a deal to restructure its EUR315 billion debt, possibly by stretching out maturities, capping interest rates and postponing interest payments.
The combination of a debt deal, Greece's inclusion in the European Central Bank's bond-buying program and a successful re-entry to capital markets could mark a turning point for the country's economy, already nine years in depression.
An agreement between Greece and its creditors--particularly Germany and the International Monetary Fund--is key to any debt relief. According to people familiar with the talks, IMF Managing Director Christine Lagarde and German Chancellor Angela Merkel agreed in principle in a February meeting to find a solution to lighten Greece's debt burden.
Pierre Moscovici, the European Union's economics commissioner, said Thursday that an agreement on debt relief should come by a May 22 meeting of eurozone finance ministers. However, Greek and EU officials say mid-June is a more realistic deadline. In a statement Thursday, the German finance ministry said "there are currently no preparations under way for Greek debt relief."
An agreement will require the parties to find a compromise between IMF demands to nail down the specifics of a debt restructuring and German demands to leave the details until the end of the bailout in summer 2018, say officials from Greece and its creditors.
Germany wants this year's agreement to be sufficiently vague to prevent a domestic political backlash ahead of the country's elections in September. IMF officials have said the agreement has to be concrete enough for the fund's board to approve a new loan program.
"This is a political exercise," one Greek official said. "Everybody has already agreed that there will be a deal."
Athens then hopes the European Central Bank will follow quickly with a signal--even verbal--that it will admit Greece's debt into its massive bond-buying program. Even "a first statement from Draghi endorsing Greece in the [bond-buying program] would be enough to send the signal to the markets," one Greek official said.
Greece has been locked out of the ECB's bond-purchase program since it began in March 2015. ECB officials say they want to be convinced Greece's debt-load is sustainable before buying Greek government bonds.
The ECB could begin buying Greek debt as soon as July if it judges that the right medium-term measures are in place, said one person familiar with the matter. While the ECB would likely buy only EUR3 billion to EUR4 billion of Greek bonds, according to market analysts, such a move would go far to restore investor confidence in the sustainability of Greece's debt. "Many fund managers are wary of investing in Greek assets without such a signal," the person added.
If that happens, Greece could tap the markets in either July or September, say senior government officials in Athens.
Greece's current bailout program ends in July 2018. After that, the country needs to be able to fund itself from the capital markets, or it would require another bailout to remain solvent. The EU, including Germany, would like to bring to an end the bailouts that have cause great political friction for the currency bloc, according to EU officials.
Greece tapped the markets in 2014 with five-year and a three-year bond issues in April and July 2014. The first transaction exceeded expectations and the issue was seven times oversubscribed, raising EUR3 billion, but the next sale just found enough buyers, raising $1.5 billion.
Optimism that a deal could mark the beginning of the end of seven years of economic, political and social upheaval in Greece has fueled a strong rally in Greek assets. On Thursday, the European Commission said it expects Greece's economy to growth by 2.1% this year and 2.5% in 2018--a turnaround for an economy that has lost 27% of GDP since early 2008.
The Greek stock market rose on Thursday for the 13th straight session, the longest positive streak since 1991. The Athens stock index is up 16% in the past month and has nearly erased all the losses it suffered since the turbulent summer of 2015, when Greece defaulted on IMF loans, capital controls were imposed and it stock market remained closed for five weeks.
An auction of three-month Treasury bills on Wednesday drew bids amounting to EUR1.1 billion, including some from foreign funds--the first such interest from international investors since 2015.
Indeed, Greek bonds have rallied sharply in recent weeks on the prospects for a new deal. The yield on two-year Greek government bonds has roughly halved since mid-February to 5.2%, according to Tradeweb. Yields fall as prices rise.
"The progress of the bailout talks confirms our view Greece is staying in the euro for the time being... their bonds offer an attractive return, " said Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management, who has held Greek bonds in some of the hedge-fund portfolios he oversees for several months now.
But Greece's subinvestment-grade credit rating means many investors simply won't touch its bonds. As a result, the Greek treasury may well have to rely heavily on buying from a mixture of domestic investors and yield-hungry hedge funds if it wants to issue more debt.
"We're looking for sustainable investments. It's hard to argue that Greece should be on our radar screen," said John Stopford, head of multiasset income at Investec Asset Management.