Next bond issue to be sink or swim moment

There was a slightly surreal feeling last week about Greece’s return to the bond markets for the first time in three years.

It says much about the transformative influence of the country’s situation, or maybe just power itself, that SYRIZA and New Democracy switched roles between 2014 and 2017: Three years ago, SYRIZA screamed from the opposition benches that by issuing a five-year bond, the New Democracy-led government was simply lumping extra expensive debt onto the shoulders of Greeks so it could gain political points. Last week, the conservatives issued similar charges, while the SYRIZA-led coalition argued that the bond issue was a sign of Greece being on the road to recovery.

In each case, a vital decision about the future of Greece’s economy has become wrapped up in political short-termism. In their rush to decry the decisions to return to the markets, the parties have imbued the bond issues with a level of toxicity they do not deserve, clouding people’s judgment about what is involved.

Both in 2014 and last week, for instance, critics argued that the bond issues were an expensive public relations exercise because Greece borrows from the European Stability Mechanism with an interest rate of around 1 percent, which it could never match or better on the markets. On Tuesday, Greece raised 3 billion euros with a yield of 4.625 percent, while in April 2014, the five-year note went for a yield of 4.95 percent.

The observation that both are expensive forms of borrowing is not wrong but it overlooks the purpose of the bond issues, which in both cases was to re-establish a relationship with investors after a long period in the wilderness and to begin the process of reducing the cost of borrowing so that when the bailout ends, Greece can turn to the markets for sustainable funding.

The logical continuation of the argument that Greece borrows cheaply from the ESM and not from the markets is that the country should remain in a bailout program for ever. It is exactly what the creditors want to avoid, as should all Greek political parties.

Greece has to stand on its own feet at some point. By next year, when the bailout ends, eight years will have passed since the first memorandum of understanding (MoU) was signed: Almost a decade of painful measures, fraught negotiations, multiple scares and frantic legislative action that has taken a toll on the people, the country’s decisionmakers and its creditors. It is a process that must come to an end, for everyone’s benefit.

One of the key elements to ensuring that the third MoU can be completed successfully is Greece regaining market access for good, which involves investors having some long-term confidence in the country and Athens being able to borrow at reasonable rates that will not leave it struggling to repay investors in a few years, triggering a new crisis.

This is the context in which Tuesday’s bond issue should be seen, as was the case when the April 2014 note was issued. Poring over what the yields or spreads were three years ago and where they stood last week will not provide any definitive answers. The yield is comparable with the ones that accompanied the bond issues conducted by Portugal, Ireland and Cyprus as they prepared to exit their bailouts. Greece started issuing bonds earlier than them (13 months before the end of the program) but this reflects the fact that its relationship with the markets is in a worse state than the others and, after seven years in a program, it needs more time to rebuild trust with investors.

The only vital question with regards to last week’s issue is whether it will prove the first in a series of steps over the next 12 months toward achieving genuine market access.

Finance Minister Euclid Tsakalotos has suggested there will be up to two more bond issues by the end of the program. That is when we will see if Greece’s relationship with the markets is returning to normality. Tsakalotos suggested on Thursday that the next bond would be issued after there is further clarity on the debt relief measures. Athens is hoping that soon after the German elections near end-September, the eurozone creditors will resume discussions on what debt restructuring interventions to make after August 2018. This entails there being no complications as a result of the outcome in Germany, where the FDP liberal party, whose leader Christian Lindner has argued in favor of Grexit, looks on course to become the next coalition partner of Chancellor Angela Merkel’s CDU.

There have been so many setbacks in the past for Greece that nobody can be certain things will be straightforward this time. However, the path ahead for Athens is clear: Complete the next review, wait for the debt relief discussion to resume, tap the markets again, build a cash buffer, carry out the remaining reforms to complete the program and then, when the bailout ends in August 2018, make the most of the implementation of debt relief measures as well as any return of growth and optimism.

In this context, the next bond issue, and perhaps the one after that, take on a greater importance than last Tuesday’s. This means that apart from hoping its European partners make headway on the debt issue, the government’s insistence that it intends to end the next review swiftly must prove to be more than rhetoric.

Last week’s bond, which consisting of a swap as well as a new tender, was the equivalent of cautiously dipping a toe in the water: 1.57 billion of the 3 billion raised stemmed from the swap and the remaining 1.43 billion from new money. Furthermore, those who took part in the swap were enticed by the government’s offer to pay 102.6 percent of the nominal value of the 2014 bond they held.

The next bond issue will have to be a much bolder move. Greece will have to dive in, hoping it will be able to swim rather than sink.