Greece’s attempt in the International markets

On Tuesday 25th of July Greece will attempt to sell State bond after 2014, although the conditions are favorable there is also reasons for concern.

On Tuesday 25th the Greek government authorized six banks (BNP Paribas, Bank of America-Merrill Lynch, Citigroup, Deutsche Bank, Goldman Sachs και HSBC) to issue a five year bond in the markets. The target for the Greek authorities is to achieve an amount of four billion euro’s with an interest rate below the 4.95% which the same five year bond has achieved in 2014. At the same period the Greek authorities invite new investors for the new bond to buy it but also holders of the bond that matures in 2019 to swap it with the new bond that matures in 2022.

The Greek authorities believe that is essential for the country to return gradually in the financial markets in order to be able to sustain its debt after seven years of austerity policies and bail outs from the European Union partners. Current Greek bonds are traded at 3.6% on Monday morning compared with the 63% at the high of the Greek financial crisis in 2012 when the ministry of finance was unable to pay wages to the public sector and were riots in the street of Athens. The yield fell to 3.4% when the government announced that intend to return in the markets. The positive response was continue by the statement of the European Economy Commissioner Pierre Moscovici which state that: ‘described the public spending cuts imposed on Greece since it almost went bust as “too tough” but “necessary”, adding there was now “light at the end of austerity” The Greek government believe that the positive attitude is reinforced by the upgrade of its bonds by S&P from stable to positive and the targets which achieve such as the surplus of 4.2% for 2016 the steady decline of unemployment from 27% to 21.6%, the closure of the second evaluation by the European committee, the International Monetary Fund (IMF) and the European Central Bank (ECB) which led to the release of the funding for the Greek relief program and the positive news that on Tuesday at midday the interest rate locked at 4.625% with the coupon to have closed with a interest rate at 4.375%. The demand for the bond by the investors was at 6.5 billion euro’s which is double the amount of the offer.

Although the situation seems favorable for the Greek Economy there are reasons for concern. Marcus Asworth and Marc Gilbert on their Bloomberg article are emphasize the three years absent of Greece from the bond markets and the necessity that the return should be more cautious in order the opening which the Greek administration has to remain open in order the Greek debt to become sustainable again. Mr. Asworth and Gilbert based their concern that in the previous attempt by the Greek Government in 2014 the investors have endured a wild rise in price due to the uncertain political and economic environment the first six month of 2015 when after the election Greece have a new government which try the first period to renegotiate its debt without the consensus of the lenders. Also both Mr. Asworth and Mr. Gilbert consider that a deal of three billion euro does will achieve the target of financial independence without upsetting its main creditors particularly those that will extend the maturity of their bonds. So if Greece succeeds in this week would then be able to both lengthen its debt profile and pave the way for later opportunities to raise money.

The reason for concern about the attempt by the Greek authorities to return in the bond markets is the latest report from the International Monetary Fund Press Release No. 17/294 in which analyzes the progress of the Greek Program and more importantly its conclusion about the sustainability of the public debt. More specific the report consider that the surplus target of 3.5% of GDP is satisfactory but it must soon be reduced to a more sustainable level of 1.5% of GDP. This reduction of surplus will allow the creation of fiscal space in order to stimulate better fiscal investments, target social assistance and lowering the tax for the purpose to support growth. The GDP the last three years was flat stabilizing the economy after a crisis of confidence in 2015 , but economic uncertainty, limited access to financing, record-high non-performing loans, and remaining capital controls are holding back investment.

The financial sector of the program focused on creating the conditions for addressing high non-performing loans by strengthening and implementing the legal framework for debt restructuring. Also the authorities are committed to relaxing capital controls prudently while safeguarding financial stability. The structural reforms are the ongoing reforms fostering competition, liberalizing Sunday trade and select closed professions, and facilitating investment. The debt remains unsustainable. Further discussions are needed to converge on a strategy based on realistic assumptions and on a broadened scope for debt relief to restore Greece’s debt sustainability. If the previous reforms are implement fully then the output is predicted to grow by 2.1 percent this year and 2.6 percent next year, on the back of continued resilient private consumption and a recovery of investment from low levels, supported by EU funds and improved confidence. On the long run growth is expected to converge at the 1% annually driven by the effects of continuous structural reforms in order to overcome the negative impact of aging population.

The most important aspect from the IMF report is the sustainability of public debt, according to the IMF the debt is unsustainable and until 2018 with the end of the program there must be a reconstruction in order to become sustainable. IMF is an organization the investors and the markets take in account particularly in the bonds market. The reason is a state is able to refund its debt if the public debt is sustainable otherwise if the international organizations consider the debt unsustainable then the interest rate take such digit that is forbidden for a country to have access to funding. Although the report by the IMF doesn’t seem to have a major impact in the case of Greece since Friday when it was issued we must take in account that other European countries which follow similar policies now are in the markets and their bonds have lower interest rate than the Greek bond. A example is Portugal which her economy has similarities with Greece and the Portuguese bond has an 1.3% interest rate make the spread between him and the Greek bond at 3.325% lower. If we consider that Greece is also in a program and until 2018 the funding of the country is depend by the European partners then this slowly recovery in the international markets is expensive for the fragile Greek economy.