Publications
Partners
London - Greece could be on the verge of making one of the fastest market comebacks of a defaulted sovereign ever recorded.
To the surprise of doomsayers who just two years ago reckoned its debts were so big that only a return to a devalued drachma could save it from decades of ruin, Greece is now mulling a five-year bond sale within the next three months, according to a finance ministry official.
The plan to return to capital markets just over 24 months after its debt restructuring amounted to default appears to make little sense on paper.
Estimates of Greece's potential market borrowing costs over five years range from 3.25% to 6.5% - indicating that even the most optimistic scenario is more than double the roughly 1.5% cost of borrowing from the European Union.
But if Athens can persuade private bond investors to buy €1.5-2bn so shortly after imposing heavy losses on them, it could be a game changer that boosts its ability to repay its debts at affordable interest rates.
It would not only raise confidence in Greece's ability to fund itself and aid its recovery, but it also offers Europe the chance to claim its widely criticised crisis medicine of tough cuts and austerity was necessary and ultimately successful.
"It would be hugely important for them in a symbolic way," said Hung Tran, executive managing director at the Institute of International Finance, a global financial industry body that negotiated Greece's debt restructuring in March 2012.
"The government wants to have the narrative that Greece has overcome the crisis and regained international confidence... If you look at it from the eurozone's perspective you might consider (Greece's progress)... a success story."
Slight return
Since Mongolia became the first sovereign to restructure its bonds in 1997, it has taken an average 4.5 years for countries to come back to the market, with almost half of those countries still locked out, IIF data show. Considering only those that regained market access, the average time was 3.3 years.
Thirty-four countries have restructured their bonds over the intervening 17 years. Prior to 1997, states had only renegotiated loans.
When it restructured its debt, Greece exchanged its old bonds for cheaper ones coming due in the next 10 to 30 years. It has no liquid bonds maturing earlier than that, so estimating what would be its five-year borrowing costs is a tough task.
Piraeus, Greece's second largest bank, issued a three-year bond two weeks ago at a yield of roughly 5%.
Taking that as a proxy, and adding a premium for the longer maturity and Greece's lower ratings, Isabelle Sanson, a fixed income portfolio manager for Natixis AM, estimates Greece could issue at 6 to 6.5% - equal or slightly lower than its 10- and 30-year secondary market yields.
Fadi Zaher, head of bonds and currencies at Kleinwort Benson, thinks the cost should be at least 300 basis points over Italy's, or roughly "5-6%".
None of them would buy Greek bonds for that price though, saying Greece's debt burden of roughly 170% of economic output still poses significant repayment risks.
Yet, optimists say tapping real demand for this paper could become a virtuous circle. Greek bondholder Hans Humes, chief investment officer at Greylock Capital, said costs should be as low as 25 bps above Portugal's, or about 3.25%.
For a start, high borrowing costs are not always a deterrent for issuers where proof of access is paramount. When it came back to the market after a two-year post-bailout hiatus, Ireland issued five-year bonds at 5.9% in 2012.
Strong demand at the sale acted as a catalyst for further falls in yields and now they trade around 1.65%. Portugal came back after a similar break with a five-year bond at 4.9% in 2013. Now those bonds trade at 3%.
"Sure, the costs are a bit higher when coming to the market but the sooner they do it the better," said Humes, who believes Greece's debts to the private sector are so small compared to those owed to the EU and IMF that another haircut imposed on private investors makes little sense.
"Selling to a voluntary market on a new issue basis is a game changer," he said.
Timing
Another reason why analysts believe Greece is considering this sale is that a strong result could earn some points for the ruling parties before the European elections in May.
But such timing would be another reason to worry for some investors. The anti-bailout Syriza opposition party is leading in polls and a win at the EU elections could strengthen its calls for early national elections in Greece.
The government only has a three-seat majority in parliament so early elections are a constant risk.
"It's a political decision (to come back to the market). It's a good time for the public opinion to show that austerity measures have not been unnecessary," said Sanson of Natixis.
"But I'm not sure I would want to invest in Greece especially before the European elections ... Syriza is an anti-euro party and there is still a lot of uncertainty."
Greece's ruling parties would not be the only ones boasting about a successful sale. Many political leaders across Europe would try to capitalise on it too.
Other observers say politicians will be more restrained.
Analysts attribute most of the rally in lower-rated bonds - Greece's 10-year yields have fallen to 6.50% from over 30% in the past two years - to European Central Bank president Mario Draghi's promise to "do whatever it takes" to save the eurozone.
Major reforms such as transforming the euro area into a fiscal and a banking union are yet to be completed.
"One can also make the case that (the easing of the eurozone crisis) comes from the ECB's promise to keep the euro intact ... and that fundamental reforms made some progress but nowhere near what needs to be done," said Tran at the IIF
