Market ructions to delay Greece’s post-bailout bond sale

Greece celebrated the end of eight years of bailouts on Monday, but expectations that it will mark its new-found fiscal independence with a much-anticipated bond sale next month may be dashed as wider tensions play out.

Having exited its third international rescue package, the debt-laden nation has been widely tipped to return to market with a benchmark 10-year issue as early as September, as it seeks to rebuild its bond curve and re-establish itself as a regular borrower.

Market tensions over a new government on Italy forced it to shelve those plans in May.

Now a currency crisis in Turkey is hitting global risk sentiment, again making issuing such a bond prohibitively expensive.

Three of Greece’s primary dealers – banks appointed to buy government debt and maintain secondary market liquidity – reckon Greece would have to offer a yield of well over 4.5 percent and possibly as much as 5 percent to attract investors, levels Athens would likely consider unsustainable.

“At the moment, we just don’t believe there is a deal there. I think we need to see the Turkey situation calm down and the Italy political scene become a bit stable,” said one of the dealers, asking to remain anonymous as he is not authorized to speak about clients.

“Right now they would have to pay a gigantic new issue premium – and they don’t need to do it immediately, so I would wait.”

Two other bankers working for Greece’s primary dealers agreed, with the second saying that Greek debt agencies were “sensible” and unlikely to rush into a deal.

The country’s current benchmark 10-year bond maturing in January 2028 was yielding as little as 3.81 percent in July but now trades at 4.33 percent.

Investors who have tracked Greece’s recovery from the depths of its debt crisis of 2010 onwards, when it struggled to make coupon payments, suggested a premium was in order.

“It’s been an impressive recovery and we are keen to see more bond issuance,” said Nick Gartside, international chief investment officer of the fixed income at JP Morgan Asset Management, one of the biggest bond investors in the world.

“The investment case is there, but as with all these things it’s a question of pricing.”

Greece has never formally announced a planned 10-year bond sale, and DZ Bank rates strategists noted that, thanks to a final 15 billion euro ($17.2 billion) credit tranche from the eurozone bailout fund, it is not for the time being reliant on any further revenues from bond sales.

Even without new bond deals, Greece would have a revenue surplus of 13.1 billion euros for 2018 and 2019 combined, they said in a research note.

The three bankers said that a new issue premium of anywhere between 25 and 40 basis points would most likely be required to get a 10-year bond deal sale away.

The shape of the Greek government bond curve suggests that a September 2028 bond would trade at a yield of around 4.40-4.45 percent. Including the new issue premium, that takes the yield on a new 10-year bond toward the 5 percent mark.

“Does it really make sense for them to issue at that level when they are able to achieve funding from ESM at much cheaper rates? I know they want to demonstrate they have market access, but they are pretty sensible as well,” said the second primary dealer.

The eurozone’s two bailout funds, the ESM and European Financial Stability Facility (EFSF), set their lending rates at 0.99 percent and 1.44 percent respectively. Most of Greece’s debt to the eurozone is to those two institutions. [Reuters]