Greece’s inability to tap markets due to a lack of credibility, analysts say

The government has blamed international market turmoil – sparked by Rome’s confrontation with the European Commission over the Italian budget – for its inability to issue bonds, but foreign analysts tell Kathimerini that the reasons are mostly made in Greece.

Although the Italian crisis is indeed one of the factors that have locked Greece out of the markets, analysts cite a series of other reasons that are keeping investors at bay: political risk and talk of handouts ahead of elections; the government’s backtracking on commitments made to international creditors and its reluctance to implement the pre-agreed reforms; banks’ ambitious bad-loan reduction targets and weak profits; and business scandals and practices that have cast a long shadow on local entrepreneurship and underscore institutional shortcomings.

“The Greek government has been trying for months to attract investors, but this effort has been in vain as the country risk has risen,” an analyst at a major European bank covering Greece tells Kathimerini. He cites Greece’s high ranking among the world’s most corrupt countries, scandals associated with Greek firms, high taxation and the huge bureaucracy.

“Italy is part of the story but there is also an equally important Greek side,” says Wolfango Piccoli, co-president of Teneo Intelligence. “Athens lost its window of opportunity earlier this year because it dithered over the bailout reviews. The decision to exit the program without a precautionary credit line is also a contributing factor. More recently, the back rolling of structural reforms and the campaign mode adopted by the government are also affecting investors' views on Greece,” he notes.

“I think the bigger question is whether there is demand for Greek debt at rates that are affordable. Greece doesn’t want to be in a situation where the auction fails. Furthermore the rate could well be quite high. Volatility is one problem, but I would suggest that the solvency of the Greek banking system is another,” adds Michael Hewson, chief market analyst for CMC Markets in London.

Gianluca Ziglio, senior fixed income analyst at Continuum Economics, agrees that “volatility in Italian bonds may also be used as a culprit for Greece’s own vulnerabilities in getting back to funding in the capital markets, particularly with issuing large volumes at longer dated debt (such as the 10-year bond), a funding option which the Greek government seems to be preferring but which macroeconomic, fiscal and political medium/long term uncertainties still make less viable compared to the possibility of issuing at shorter maturities.”

He goes on to refer to the “key obstacles to Greece returning to access the capital markets,” i.e. “Greece’s sub-investment grade rating; occasional disputes with creditor institutions about relaxing austerity and reviewing previous commitments (such as the pension reform) which could endanger the availability of the cash buffer for near term refinancing purposes absent a precautionary or primary market ESM program; the upcoming political risk; the absence of collateral eligibility of the Greek government bonds at ECB operations (due to the government’s decision of a “clean exit’ from the third program, which effectively prevents Greek banks from providing a backstop to the state’s refinancing therefore increasing foreign investors’ confidence on its ability to issue debt); and Greek banks’ ongoing issues with NPEs all contribute to keep investors cautious about committing capital to Greece with a long investment horizon at this time.”

Carsten Hesse from Berenberg also argues that the benchmark bond yield at 4.2 percent would raise debt repayment costs for Athens: “Greek 10-year government bond yields are trading currently around 4.2 percent. This is far above the average interest cost that Greece currently pays for its debt (below 2 percent) amid very cheap interest loans from the official lenders. The current yield level would increase the amount of interest the government has to pay.”

For example, he says, if “the government would issue tomorrow 10 billion euros’ worth of 10-year bonds at around 4.5 percent yield, this would add about 450 million euros in interest costs to the budget in 2019. I guess the government prefers to spend that money on other things such as preventing a reduction in pensions/income tax threshold. As long as Greece has this large cash buffer, there is absolutely no urgency to tap the bond markets just now.”

Hesse further warns that borrowing at a yield above 4 percent is unsustainable: “Obviously the government could sell it as a success if it could tap the market, but as there is no urgency it probably only makes sense at lower interest rates. Also investors would start to ask questions how sustainable it would be to refinance in total 180 percent of GDP worth of debt at a rate of over 4 percent over the very long-term. Currently Greece spends around 3.5 percent of GDP on interest payments annually. Financing 180 percent of GDP in theory at 4 percent interest would increase annual interest payments to over 7 percent of GDP per year. Even if you would have a 2.5 percent primary budget surplus one would end up with an unsustainable 4.5 percent budget deficit in this case.”