Greece was preparing for a liquidity management exercise in mid-November, a bond swap concentrating the 20 bonds issued in the context of the 2012 debt restructuring, known as PSI, into fewer, more liquid bonds, following its successful return to the markets last July.
The goal is a capital buffer
Top finance ministry officials were plan- ning for more bond issuance after the conclusion of the third bailout review, hoping it will rekindle debt relief talks. The goal is to create a capital buffer of 15 billion euros from tapping the international markets and loans from the European Stability Mechanism (ESM) to underwrite a clean bailout exit post August 2018.
Greece returned to the bond markets last July for the first time since 2014 with a 3.0 billion euro syndicated sale of a new 5-year bond combined with a tender for the existing bond maturing in 2019. Since the IMF objected to raising the ceiling on Greece’s central government debt and the third review was not over, the authorities decided to proceed with a liquidity management operation.
However, the authorities reportedly awaited to see the ECB’s decision with regard to its bond purchasing programme (QE) and its impact on the markets as well as the course of the negotiations over the third bailout review before going ahead with the liquidity management transaction. The latter involved a bond swap, packaging 20 securities, widely known as the PSI strip, with a total nominal value of 29.7 billion euros, into four or five liquid bonds with the same face value.
The effect of the ECB’s decision turned out to be quite benign on euro bonds. The European Central Bank decided to further reduce its monthly bond purchases from the beginning of 2018 through September 2019 while leaving the door open to more purchases if necessary. The monthly purchases will be decreased to 40 billion euros from 60 billion at present.
In addition to awaiting the ECB’s decision and the third bailout review talks, the Greek authorities had also to cope with some technical issues as well as convince the PSI strip bond holders to swap their bonds with new ones. However, the biggest obstacle turned out to be the ECB itself on scal monetisation grounds according to an informed source. It is noted the Common Fund at the Bank of Greece holds PSI strip bonds worth 6.0 billion euros.
Greece is expected to issue a bond, aiming to raise at least 2.0 billion euros upon the completion of the third bailout review next year. The bond issue is likely to take place between February and April. Some analysts have suggested that the country could proceed with a switch auction to replace the 2019 bond by a new 3-year bond. This way it could reduce further the amount of redemptions in 2019.
Key to Greece’s credible access to the markets and a clean exit from the bailout programme is debt sustainability and the relief measures the Eurogroup has committed to take close to the end of the programme if necessary. The French have reportedly presented a proposal, linking economic performance to debt servicing in the long-run and likely capping Greece’s annual financing needs at 15% of GDP for decades.
But it is not clear whether the debt relief measures the Eurogroup may decide to take will render the Greek debt sustainable according to the IMF measurements. The debt sustainability analysis embedded in the programme rests on the assumption of a scal primary surplus reaching 3.5% of GDP in 2018 and remaining at that level at least until 2022. Nominal GDP is predicted to rise about 4.0% from 2018 through 2022.
The IMF and the European disagree on their projections about Greece’s long-term average economic growth rate. The IMF continues to insist it will average 1.0%, which is much lower than the rate the European institutions predict. This implies that generous debt relief measures will have to be taken for the Greek public debt to be sustainable but Germans and others do not look favourably to such measures. It is hard to see how these differences will be reconciled, which makes some people think the IMF may decide to walk out of the programme. In this case, it is possible the ESM could be upgraded to a European Monetary Fund and assume its role. The stance of the new German government on that will be critical.
The Greek 10-year bond yield was hov- ering between 5.4-5.6% after the coun- try’s exit to the markets last July till end of October but dropped sharply to 5.08% on November 1 on news that the first round of talks between the government and the representatives of the creditors in Athens over the third review went smoothly with few, minor disagreements and leaks about the country’s new market exit. The yield has ranged between 5.047-5.178% in November and hovered between 5.047 and 8.04% in the last 52 weeks.
The risk premium investors demand to buy the Greek benchmark bond maturing in 2027 over bunds fell to 465 basis points in mid-November from 531 basis points on September 27 but closer to 470 points seen in July before the 5-year bond auction. It is noted one percentage point is equal to 100 basis points.
The smooth rst round of negotiations over the third review and the rumors about the country’s bond swap had a dampening e ect on the yields of short- er-rated bonds.
More specifically, the yield of the bond maturing in 2022 saw its yield fall to 4.15% on November 1 and stabilised around this level until the middle of the month. It was hovering around 4.5-4.6% most of the time since it started trading in early August, following the auction.
The yield of the 2-year bond maturing in 2019 has been more volatile. It stood around 2.9% in mid-November after dropping to 2.8% on November 1, following similar moves in other Greek bonds. The yield fell to 3.2%, following the July auction after hovering around 4.05% earlier the same month.