Bloomberg: Greece Gets Investor Thumbs Up on Possible Return to Bond Market

29 June 2017
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If Greece returns to the bond market this year, Mark Dowding would be a buyer.

“We have been bullish on Greece over the past year or so,” said the partner and portfolio manager at BlueBay Asset Management in London, which owns some long-dated Greek bonds. “We’ve also formed the view that lenders would remain committed to helping Greece. I feel relatively confident that Greece will be returning to market in the second half of this year.”

The change in sentiment toward Greece — the epicenter of the European financial crisis — is reflected in the fact that country’s bond yields are the lowest since before the turmoil even as the debt remains deep in junk territory. Adding to investor confidence, Greece’s euro-area creditors agreed to release 8.5 billion euros ($9.5 billion) in new loans on June 15 even as they postponed until mid-2018 a binding decision on what measures they will provide to ease the country’s burden.

Although Athens has not definitively said it will be selling bonds this year, many in Prime Minister Alexis Tsipras’s administration say the question is not if but when. A successful second bailout review, an improved economy and greater support from euro-area partners may embolden Greece to consider a return to the market for the first time since 2014. All indications are that yield-hungry investors would welcome new Greek paper even though the country isn’t part of the European Central Bank’s quantitative-easing program.

“The Greek deal, the prospect of QE and debt relief, the carry environment, the French election result as well as a new bold European unity all tell you should own Greek bonds,” said Mark Nash, head of global bonds at Old Mutual Global Investors in London. Nash bought 15-year Greek bonds after Emmanuel Macron won the French presidential election in May.

Investors like Nash and Dowding say markets would lap up new five-year paper if it yields between 4 percent and 5 percent.

In the corridors of the Greek government, discussions are focused on when exactly to tap the markets. One school of thought backs early July, before the International Monetary Fund Managing Director Christine Lagarde presents to its board her staff’s assessment of Greece’s debt sustainability. The fund’s report is expected to suggest that debt-relief measures are needed to ensure Greece can refinance its obligations.

Other government officials say it would be better to wait until September, giving Greece enough time to gauge market sentiment and the ability to lay out its economic growth and reform plans.

“The wider environment remains supportive so assuming we don’t move into a risk-off environment, one could reasonably expect it by year-end or early next year,” said George Zois, a fixed-income director at Mint Partners in London. Even if the government were to tap the markets sooner, “capital would probably be forthcoming,” he said.

Argentina Effect
Finance Minister Euclid Tsakalotos has already held several meetings with market participants this month in London. His case has been bolstered by the June Eurogroup statement that cleared up some of the uncertainty regarding the IMF’s participation in the Greek program, the fear of a potential clash between the IMF and Germany, as well as the timing of the bailout-funds disbursement.

Also creating potential demand for Greek debt is the quest for yield in a low-interest-rate environment. While much of the euro area pays less than 2 percent to borrow over 10 years, the Greek yield stands at about 5.3 percent.
“Some investors may still be worried about Greece’s debt, but demand for yields is stronger than the worry,” said Soeren Moerch, head of fixed income at Danske Bank A/S in Copenhagen. “If investors can go for Argentina’s century bonds, then it should not be difficult for Greece to find buyers for its bonds.”

For its return to the market after three years, Greece is likely to sell a new five-year bond, government officials said. It may also call on holders of five-year notes maturing in 2019 to replace – if they want to – their bonds with new ones. That way, Greece could reduce its financing needs for 2019, which according to government officials stands at around 19 billion euros.

Appealing Yield
“A five-year bond issuance, together with an exchange of issues that mature in 2019 at 4.75 percent coupon, could be a viable option for Greece,” said Nikolaos Pandis, head of the sovereign desk at Piraeus Bank in Athens. “Such an issuance, were it to happen at current levels of around 4 percent, could attract investors interest and wouldn’t create extra debt-servicing costs.”

No decision has been made on the amount Greece would like to raise. But 1 billion euros to 2 billion euros of fresh money and another 1 billion to 2 billions euros replacing bonds would be deemed a success, the officials said. The key point is the yield Greece will have to pay on the new bonds.

“Greece will most likely sell a new five-year note yielding 4 to 5 percent,” said Moerch of Danske Bank. “It might also combine this with bundling the strip into fewer bonds to make them more liquid. Greece will have very little funding need for many years so I guess 5-year maturity will sell easily in this environment.”
BlueBay’s Dowding said he would “look to add new five-year bonds around 5 percent or 10-year bonds around 6 percent.” For his part, Nash said the market would find 10-year bonds at around 5 percent or five-year bonds at around 4.5 percent “appealing.”

Pay Less
In 2014, Greece paid 4.95 percent over five years. Tsipras is seeking to pay less this time around to prove that markets trust Greece more. Although not without risk, investor perception of Greece seems to have changed.
At the height of the financial crisis in 2012, with a real possibility of Greece leaving the euro area, with the yield on 10-year bond surged to a record 44.21 percent. This week yields fell to the lowest since December 2009. And that’s even without QE and with no debt-relief guarantees.

“The Germans haven’t actually given debt relief yet so the ECB is unlikely to declare under their metrics that Greek bonds are sustainable so QE might be on hold for Greece for now,” said Nash. “That said, Macron’s suggestion that debt relief will be tied to Greek growth is interesting and appeals to both sides, so this is giving more positive vibes.”

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