Nervy investors deliver timely reminder

The last few days have provided a succinct and well-timed reminder of the risks and rewards that lie in store for Greece as this country heads to the end of its final bailout program.

For all the constraints and punishment that the three programs have brought, they have also provided a relatively sterile and safe environment for the country, which has been kept afloat with low-interest loans from its European lenders.

Exiting the program with no credit line means that Athens will have to rely on the money markets for future funding, and last week’s bond issue highlighted what unpredictable conditions they can provide.

Greek authorities decided to delay on Tuesday plans to issue the seven-year bond that had been in the pipeline for some weeks as a result of the turbulence on international markets and fears that this would drive up the cost of borrowing for Athens.

The postponement only lasted a couple of days but served notice to all the decision makers involved that although Greece’s economy is picking up and the bailouts will soon be a thing of the past, it remains in an extremely vulnerable position and exposed to shocks from unexpected sources that may have nothing to do with the decisions taken in Athens.

The bond was made available to investors on Thursday and the response was fairly encouraging.

The Finance Ministry and the Public Debt Management Agency (PDMA) managed to secure the 3.5 percent yield target that they had been hoping for, which was lower than the initial guidance of 3.75 percent and roughly the rate at which Greece borrows from the International Monetary Fund.

Athens also comfortably raised the 3 billion euros that had been set as a goal as bids exceeded 6 billion euros.

The breakdown of interest was also relatively encouraging, with around 210 investors lodging bids. The allocations were led by fund managers on 37.4 percent, followed by hedge funds on 31.5 percent, and banks, which took up nearly 23 percent. The transaction also had a broad geographical spread, dominated by the United Kingdom with 43.7 percent, followed by Greece at 19 percent. The overall international participation was at 81 percent.

The positives have to be tempered against the fact that the rate of borrowing was more than 300 basis points above the German Bund, which is the reference for sovereign debt in the eurozone, and substantially higher than the yield for bonds issued by Portugal, a former bailout program country of similar size to Greece.

Also, trading on the secondary market on Friday saw the bond’s yield rise to 4.015 percent, according to Reuters. “About half went to UK investors which we know are more trading-orientated accounts,” an unnamed banker told the news agency. “What this deal tells me is that Greece doesn’t have certainty of access. The bond might recover, but at the end of the day, the signal this sends in terms of access is not great.”

Thursday’s transaction, though, is part of a broader picture for Greece, which returned to the markets last summer after a three-year absence.

Athens needs to issue bonds to re-establish its relationship with investors and to bring its yield curve down, regardless of what is going on around it. At the same time, though, it has only a limited amount of time to do this (until the European Stability Mechanism program ends in August) and cannot afford to get it wrong.

If the government is not able to borrow at sustainable rates once the bailout has expired, it will have to turn to the cash buffer of about 19 billion euros it wants to build by August. This, though, will only offer protection for about a year and a half, and if the markets are not convinced that Greece can make a full and sustainable return to borrowing, talk will soon begin about the possibility of a new ESM program.

Such a development would undo many of the positives that have started to emerge as Athens is edging toward the end of the third package, because uncertainty will begin to take a grip of the economy again.

These are the dangers that were highlighted over the past few days. They cannot be ignored, but that does not mean that Greece should be deterred either. The next few months will have to be about building up market access and preparing an exit from the program that is credible and as successful as possible.

Finance Minister Euclid Tsakalotos has indicated that the government would like to sell at least two more bonds before August. It is thought that the seven-year note will be followed by a three-year bond before or after the Italian general elections on March 4 and a 10-year one before the conclusion of the bailout. There have been some suggestions that the final issue may even be a 12- or 15-year bond.

Predicting what market conditions will be like over the months to come is a difficult task given the worldwide turmoil seen over the last few days. This means that the government will have to do all it can to ensure that the other part of the equation, which involves paving the way for the program exit, has to be paid adequate attention.

The Euro Working Group held on Thursday confirmed that just three out of the 110 prior actions from the third review are left to fulfill. The aim is to have these wrapped up by the next Eurogroup on February 19. This will clear a path for the fourth review to begin.

In parallel to the fourth and final inspection of the third program, the country’s creditors will also have to decide on the reforms they will expect the Greek authorities to implement after August, the debt relief package that will be offered to Athens and the post-program surveillance that will be used by the lenders.

During his visit to Athens at the end of last week, European Commissioner for Economic and Monetary Affairs Pierre Moscovici indicated that everything should be wrapped up during the June 21 Eurogroup. After that, Greece will face its sink-or-swim moment. The last few days have emphasized that there could be testing days ahead and that continued focus will be required rather than celebrations.