The kindness of (bond market) strangers | FT Alphaville

The kindness of (bond market) strangers

As much as Greece rails against foreigners for their alleged involvements in its fiscal troubles — from ‘evil’ CDS speculation to stealing their gold —  it sure is keen to entice them to buy the country’s debt.

To wit, the hefty premium offered on its Monday sale of seven-year bonds. From the FT:

Greece made a successful return to capital markets on Monday as it raised €5bn in a new syndicated bond issue. But the high price it had to pay signalled that markets were unconvinced by last week’s European Union-led rescue package.

That ‘high price’ ended up being a yield of 5.9 per cent, or 325 basis points over equivalent German bunds. It’s also about 61bps over similar Spanish debt, and 114bps over Portuguese.

Why the need for the added enticement?

The hope was, after all, that the rescue package and fiscal consolidation announced last week should have eliminated much of the need for extra risk-compensation. Yet the narrower spreads, or cheaper funding costs, so desperately desired by the Greek government have yet to materialise.

Here then, is an interesting data point, courtesy of the fixed income team at Deutsche Bank. It’s a chart of foreigners’ holdings of Hellenic Republic bonds over the past five years.

You can see that the group currently holds some 75 per cent of outstanding debt:

With foreigners already holding three quarters of Greece’s current debt stock, convincing them to buy even more becomes increasingly difficult. Here’s what Deutsche’s Gillian Edgeworth says:

Euroland insists that the Greek sovereign continues to access the market if possible. The sovereign issuer will hope that foreigners remain keen buyers of bonds, though foreigners already hold 75% of the total debt stock. In the absence of further foreign buying, local institutions will only likely be able to absorb government issuance if domestic banks continue to draw off [European Central Bank] liquidity facilities in size.

Lucky, then, that the ECB decided to revise its acceptance rules for the collateral pledged by Greek banks on Friday. The Deutsche commentary implies that one of the worst things that could happen to Greece would be the simultaneous withdrawal from its markets of non-Greeks and the suspension of liquidity support from the ECB.

But there is of course a flipside to Greece’s reliance on foreigners.

As FT columnist Wolfgang Münchau puts its in his latest column:

When a country adopts an austerity package of such magnitude [as the one announced by Greece on Friday] it needs some form of relief, simply to make it through the recession. This would normally come either through devaluation or from a low-interest loan, usually from the International Monetary Fund, or ideally both. Greece will have neither. Under these circumstances there may come a point when the Greek government concludes that default is the financially superior option, especially since 70 per cent of Greek debt is held by foreigners. If they are smart, they will take the EU money and then default. In any case, default is still the true backstop, not the emergency loan. Bond market investors should be well aware of that.

Related links:
Europe has resolved nothing over Greece – Wolfgang Münchau, FT
Greece and the markets, post-bailout plan – FT Alphaville
Greece, the IMF, and the ECB – Money Supply
Coming to America, Greece-style – FT Alphaville