Greek Business File, November-December 2019, No 123

Βy Dimitris Kontogiannis


The 2020 outlook for Greek bonds seems pretty good.

Greece was able to sell its T-bills with negative rates for the first time ever in the fall of 2019; while bond yields continued to trend downwards, hitting historic lows even though the country does not benefi t from the ECB’s bond buying program.

Greece is in a position to finance next year’s borrowing needs without tapping the international bond markets and drawing down on its huge cash reserves. Nevertheless, Greece will continue to demonstrate its established market access by issuing new bonds and counting on further credit rating upgrades to attain investment grade status as soon as possible.

Historic turnaround

Some seven and a half years after the largest sovereign debt restructuring (PSI) in modern history, investors paid to lend to Greece for three months. The resulting negative interest rate on three-month T-bill auctions is a historic turnaround for a country rated below investment grade by the major credit rating agencies, burdened with a debt-to-GDP ratio above 175 percent and a sovereign debt regarded by the IMF as non-sustainable in the long-run.

But this should not come completely as a surprise since the country has recorded consistently large primary budget surpluses in the last few years and the economy is growing at a modest pace.

Moreover, its annual borrowing needs are relatively low until 2032 and a large cash buff er in excess of 35 billion euro, has been set aside covering its annual interest and redemption payments for at least the next couple of years. In addition, the supply of new bonds appears to be relatively small in the foreseeable future

Global investors, hungry for yield, appear to appreciate the combination of yield pick up and the relative safety of Greek bonds, driving yields below their Italian counterparts at some point in November, before normalizing again. The benchmark 10-year bond saw its yield collapse to 1.174 percent on October 31 from close to 3.0 percent in early June and hover around 1.4 percent in mid-November. The 5-year bond which yielded around 1.8 percent in early June dropped to 0.55 percent in mid-November. It stood at or above 4.0 percent in the Spring of 2018.

It is not a coincidence that the state could fully cover its borrowing needs in 2020 without tapping the international bond markets and drawing down on its large cash buffer. Assuming Greece records the projected 3.5 percent of GDP primary surplus, it will more than pay for its annual interest expenses. The 2020 draft budget foresees a primary surplus of 7.0 billion euro against interest payments of 6.0 billion, meaning there is a residual of about 1.0 billion euro.

IMF remains skeptical

In addition, redemptions have been reduced to around 2.3 billion euro next year, following the early repayment of the expensive tranche of the IMF loan to Greece worth 2.7 billion. The interest rate on the loans from the IMF is over five percent. Greece got the green light from the ESM and the IMF to proceed with the early retirement in the Fall.

It should be noted the IMF remains skeptical about the country’s growth prospects in the long-run and now sees the debt-to-GDP ratio rising by about 10 percentage points by 2028 as “lower nominal GDP and primary surplus paths during 2019–25 under current policies more than offset lower projected sovereign borrowing costs.”

The country can also count on privatization revenues in excess of 1.0 billion euro as well as the return of profits from the Greek bonds held by the Eurosystem and there is the cushion of 1.0 billion from the outperformance of the primary surplus to rely on.

A regular market borrower

Although Greece does not have to raise money in the capital markets to cover its borrowing needs, the authorities plan to tap the markets for a small amount, perhaps less than 9.0 billion euro. This is part of an eff ort to enhance its reputation as a regular market borrower, establish market access and engage in liability management transactions.

The performance of the Greek economy, public finances, the complete lifting of capital controls in early September and the sharp drop in Greek bond yields played a role in the major credit ratings’ stance in the last few months.

More companies specifically, S&P upgraded its long-term sovereign credit rating for Greece by a notch to ‘BB-‘ from ‘B+’, citing the complete removal of capital controls as a sign of continuing return to stability after the tumult of the three international bailouts since 2010. It also pointed to subsiding budgetary risks following the Greek State Council’s decisions on previous reforms regarding civil servants’ holiday bonuses and pensions.

S&P, which expects Greek economic growth to surpass the Eurozone average, gave a positive outlook on Greece. This indicates the ratings could be raised within the next 12 months if the country continues implementing structural reforms that strengthen its economic growth potential and public finance sustainability.

Still, the public debt burden is large

In addition to S&P, Canada-based rating agency DBRS MorningStar upgraded Greece’s outlook from stable to positive, but stopped short of upgrading its credit rating from BB (low).

“The confirmation of the ratings reflects the fact that Greece is emerging from the crisis years and is currently in its third consecutive year of growth. Primary surplus targets are on track. A large cash buffer exists equivalent to around two years of gross public sector borrowing needs and borrowing costs are at post-crisis lows. Still, the public debt burden is large, estimated by the government to amount to 173.3 percent of GDP at end-2019. However, the high public debt stock is mitigated to some extent by the very long weighted-average debt maturity and the fact that European Union (EU) institutions hold the majority of debt.

Since the last rating review, progress is being made in several respects, leading to the Positive trend. A new majority government is in place with strong commitment and momentum in introducing its reform agenda. Pro-active public debt strategy has consolidated market access, and in addition, Greece is on course to pre-pay Euro 2.7bn of relatively more expensive debt owed to the IMF,” DBRS said.

S&P, DBRS and Fitch Ratings, the country’s rating remains three notches below the coveted investment grade. The Greek government has made it clear that one of its main goals is to have the country’s rating upgraded to investment grade (IG) as soon as possible. IG will open the way for the ECB to buy Greek debt, assuming its bond buying program is still going on and perhaps further compress Greek borrowing costs. Moreover, it will likely enable the country to buy back some expensive debt by downsizing its large cash reserves and in general help improve the market’s perception of country risk. But it looks like it is going to take some time and a plethora of reforms and fiscal discipline to get there.