Now that the euphoria is beginning to die down let’s take a second, more sober look at what Greece achieved last week when the investment community hailed the country’s return to the markets. Politicians from Prime Minister Antonis Samaras’s government were quick to join the chorus of cheerleaders, with impressive support from members of the media and market analysts.
Indeed, on the demand side the rush to snap up the new five-year Greek bond was reminiscent of a stampede. In the same week that Pakistan returned to debt markets after an absence of more than seven years, the first Greek bond since 2010 was characterized by a particularly striking mismatch between the demand and supply side. More than 85 percent of those pension funds, private equity firms, asset managers and hedge funds – primarily from the US and the UK – who placed buy orders in the book-building process were left with portfolios devoid of Greek debt.
What does this mismatch tell us? Clearly, this was not a coincidence. Rather, it speaks volumes of a well-orchestrated bond placement, where the sale volume was not the primary objective for the Greek Public Debt Management Agency (PDMA) and Finance Ministry. If we consider for a moment the developments in the secondary market for Greek debt since the placement we can identify other targets, which appear more important for the Greek authorities in the medium-term than increasing sovereign debt finance.
After the issuance of the five-year bond and the offered yield being able to dip under the symbolically important threshold of five percent (4.95 percent), the interest rate for ten-year Greek debt declined below the six percent benchmark – a first after four years. Moreover, the spread, i.e. the yield difference between ten-year Greek bonds and the benchmark German bund further narrowed to 433 basis points. This spread was the lowest level since February 2010.
These short-term developments immediately after the landmark return to markets are significant because they are capable of setting a yield benchmark of their own. It is here that I see the central technical objective of Greek authorities’ decision to tap the markets now.
More specifically, with reduced yields on the five-year note the Finance Ministry will now be in a position to further test bond markets’ renewed interest in Greek debt with even shorter maturities. This primarily concerns its ability to sell T-Bills with a duration of 26 weeks. Only a day before it auctioned its five-year bond the PDMA sold over 1.3 billion euros worth of T-Bills with a yield of 3.1 percent.
After the success of the five-year bond we can now expect that future T-Bill auctions will see considerable downward pressure on the yield curve, i.e. declining from three percent to levels closer to two percent or even lower. This downward yield adjustment was already in evidence in the T-Bill auction that took place this week (15th April). The PDMA sold a total of 1.625 billion euros worth of 13 weeks T-bills for a yield of 2.45 percent.
If this downward trend solidifies – and there is every reason to believe it will – during the next months, it would have major consequences for the Greek government’s capacity to save on interest rate payments. In 2014 Greece must refinance a volume of roughly 14 billion euros worth of T-Bills. Instead of paying a yield of three percent, a decline in the rate closer to one or two percent would save the Greek authorities interest payments to T-Bill holders between 350 and 700 million euros per annum.
Thus, if we put the return to markets story in a broader context of the Greek authorities’ strategy to improve its short- and medium-term refinancing conditions, we start to see beyond the trees. It is not so much a story of increasing sovereign debt levels, but a step-by-step approach to lower its payment obligations on the yield side. Since Greece is fully financed by its international creditors until end-2015 and now has renewed market access, it does not need to sell additional debt. But doing so again in the course of 2014 chiefly serves the purpose to further influence the yield curve on its T-Bills as well as three, five and ten-year bonds.
These tangible benefits cannot be ignored and they underline a smart politics approach by the Greek authorities. But the proof of the strategy’s success will now depend on translating these advantages into equal opportunities for the real economy. This primarily concerns lower interest rates offered by banks for credit creation to private households and businesses. The jury on that front is still out.