Greece has had a tumultuous three years since its last sovereign debt issue in April 2014. Two elections, a referendum, a third bail-out package and lengthy negotiations over debt sustainability have weighed on the economy. On Tuesday, the country returned to the markets with a successful €3bn, five-year bond at a yield of 4.625%.
The issue was well-timed to take advantage of the momentum of the past week. The second review of the third economic adjustment programme concluded on 15 June and was accompanied by a disbursement of €7.7bn from the bail-out package. The International Monetary Fund then issued approval ‘in principle’ last Thursday of a new €1.6bn standby arrangement. This will go ahead provided European creditors agree to some debt restructuring.
The good news continued when the rating agency Standard & Poor’s changed its outlook on Greece’s debt to positive, in line with Moody’s move in June. Political stability also seems to have returned: while Alexis Tsipras’s party is behind in the polls, he is the longest serving prime minister in post-crisis Greece. Riots and demonstrations on the streets of Athens have reduced, helping tourism numbers to rise. Greece is further benefiting from a euro area recovery. Against this backdrop, existing five-year Greek government bonds were trading at 3.6% on Monday. This compares with 63% at the height of the crisis in 2012.
In economic and communication terms, the issuance was a success from the government’s perspective as it achieved a lower yield than the 4.95% of April 2014. Tsipras described the issue as ‘the most significant step to finish this unpleasant adventure’, while Pierre Moscovici, EU commissioner for economic and financial affairs, took it as ‘another positive signal of trust in the Greek economy’.
While optimism is badly needed in Greece, it is important not to get carried away. The 2014 bond sale was followed by the drama of 2015 when the Syriza-led government clashed with creditors and brought back the possibility of Greece’s exit from the European Union. Tsipras must avoid the hubris of Antonis Samaras, who as prime minister mistook the 2014 issuance for the turning point. He became complacent, backsliding on politically painful changes. Creditors are concerned that such complacency may be repeated. In an interview with the Greek newspaper Naftemporiki, Delia Velculescu, the IMF mission chief in Athens, said that ‘steadfast policy implementation’ was critical to sustaining market access.
The success of the issue, rather than being a good sign for Greece, could be an indication of how willing investors are to take on risky assets against the backdrop of central banks suppressing returns through monetary easing. Even Argentina – a serial debt defaulter – successfully issued a 100-year bond a few weeks ago.
Finally, while the yield was lower than that of April 2014, this is not the right metric to judge it by. Instead of comparing the absolute level of the yield, it is more meaningful to focus on yield spreads – the difference between the yield in the current issuance and that of other countries. Germany – the benchmark case – had a yield of 0.59% in 2014, a 436bps spread with Greece at the time. Germany’s yield is now at minus 0.15%, a 476.5bps spread with Greece. An even more meaningful comparison would be with countries that have been through bail-outs themselves. In 2014, the spread between Greek and Portuguese bonds stood at 240bps. This week it was much higher, at around 343.5bps.
This is puzzling. Looking at debt sustainability in the two economies, the debt-to-GDP ratio is much higher in Greece than in Portugal. But the two countries’ gross financing needs, a more appropriate measure for debt sustainability given the concessionary nature of Greek debt, are very similar. Being part of a bail-out programme is the key difference. Portugal returned to the markets in May 2013, a year before exiting its own programme, with a 10-year, €3bn bond that had a yield of 5.67%.
Given the small scale of Tuesday’s issue, it should be seen as testing the waters. The government must focus on implementing the policies that will make possible a return to market financing on a sustainable basis by the end of the economic adjustment programme in August 2018.
Danae Kyriakopoulou is Chief Economist and Head of Research at OMFIF.