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Greece unbound

8 April 2014 By Hugo Dixon

Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.

There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent. 

Two of the country’s big four banks – Piraeus and Alpha – have raised 3 billion euros of equity between them in recent weeks to reinforce their balance sheets after a stress test orchestrated by the central bank. Eurobank, another big lender, is planning to follow suit with a 3 billion euro issue later this month. 

The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.

That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.

Athens’ debt is still almost 180 percent of GDP. But it is not nearly as burdensome as the headline figure suggests because the bulk of the debt is owed to other euro zone governments as a result of its two bailouts. Not only do these loans pay a low interest rate of a little over 2 percent, Athens doesn’t need to start repaying them until 2022 and then has another 20 years to complete the job.

It is unsurprising then that investors look like they will be willing to buy five-year Greek bonds. They will, after all, get their money back before Athens has to pay its public-sector creditors. What’s more, the yield, which is likely to be something over 5 percent, is more attractive than that offered by hard-currency bonds elsewhere.

Meanwhile, Greece has the opportunity to improve the deal it has with its euro zone creditors. They promised to look again at the loans once Athens achieved a primary surplus. Discussions are expected to start next month. 

A good outcome for Greece would be to see an increase of the term of the loan from 30 to 50 years, a freezing of the interest rate at its current low level, and an extension of the period during which it doesn’t have to repay the debt by another five years. The warming of Greece’s relationship with Germany – whose chancellor, Angela Merkel, will visit Athens on April 11 – suggests there’s a reasonable chance it could be rewarded for good behaviour.

The reopening of the markets to Greece also means it probably no longer faces a funding gap, which the last official projections by its creditors put at 15 billion euros over the next two years. 

The improvement in its fiscal position has cut that figure. Even more important, the government has several ways to fill the gap without borrowing more from its euro partners. Not only can it issue bonds; the two big banks that have raised equity have used some of it to repay 1.6-1.7 billion euros in preference capital injected by the government.

Investor interest in Greek banks offers two further sources of funding. First, the government could and should rapidly privatise its stakes in the four big banks. It may not get back all the 26.3 billion euros it invested but its stakes have a current market value of 24.5 billion euros meaning it should recoup a large chunk. It has recently passed legislation allowing it to sell the shares at a discount, if necessary.

Second, Greece’s bank bailout fund still has 11 billion euros in its coffers. Given lenders’ ability to access the market, the bulk of this won’t be needed. Athens should wait until October when the results of the Europe-wide stress tests are published to check that there aren’t any surprises. But after that, most of the cash could be released either to fund the state or, more likely, to repay its creditors.

The bailout fund should keep some cash back to finance a bad bank on the lines of the Spanish and Irish models. Although Greece’s banks have been recapitalised, they are still weighed down by non-performing loans. If these were hived off into a separate entity, the banks would be free to concentrate on lending to healthy parts of the economy and finance growth.

This is not to suggest Greece is out of the woods. A quarter of the workforce is still unemployed. To bring this down to acceptable levels, the government will have to continue with its reform agenda and the economy will need to grow for many years.

The biggest risk is politics. Only last week the government was shaken when a video was released of the prime minister’s chief of staff talking to the spokesman of the far-right Golden Dawn party. The aide, who has since resigned, said two government ministers had told a judge to arrest the Golden Dawn’s leadership. The ministers have denied this. It doesn’t look like the government will fall. But if it does, a government led by Syriza, the radical left opposition, would be less investor friendly.

That said, the imminent bond issue is an important milestone in Greece’s recovery.


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