Appetite for Greek debt faces test

Greece inched closer to a return to public market finance for at least part of its Sisyphean debt burden this week, with benchmark bond yields dropping to levels seen when the country last issued new debt three years ago.

Enthusiasm for the small portion of Greek debt held in private hands and available to trade followed a long-delayed agreement on fiscal and structural reform measures with European creditors this month, paving the way towards debt relief talks.

Yields on bonds maturing in 2027 fell as low as 5.6 per cent, as the price of the bonds rose to as much 86.8 cents on the euro of face value.

However, bankers and analysts questioned whether there was sufficient investor appetite to soon test the market. They said that the continent’s policymakers would probably determine Greece’s ability to attract investors to a new debt sale.

Greece has wrapped up a deal with creditors on details of reforms to unlock a €7.4bn disbursement from its €86bn bailout programme, necessary to meet debt repayments which include €2bn to private creditors due on July 17, and €3.9bn to the European Central Bank three days later.

The deal covers a range of fiscal and structural measures, from fresh cuts in pensions to liberalising Sunday trading. The bailout programme is due to end in August 2018, by which time Greece is expected to be able to finance its government in capital markets.

Representatives of the Greek government, assisted by debt restructuring specialists from the advisory firm Rothschild, have held meetings this year with investors in anticipation of future debt sales, according to people familiar with those discussions.

“In the end it’s a question of price. Probably Greece could return to the market,” said Kathrin Muehlbronner, analyst for Moody’s, a credit-rating agency, however, she also said that fundamental questions remained about the sustainability of the debt burden.

“You have an economy that’s highly dependent on these events and the liquidity they bring. I’m not sure that is a sustainable growth path,” she said.

When Greece returned to debt issuance in April 2014, for the first time since its 2012 restructuring that placed most obligations in the hands of European and multilateral institutions, the deal for €3bn of five-year bonds attracted €20bn of orders from investors. It also sold €1.5bn of three-year debt that July.

Bankers said that strong recent price appreciation for Greek debt, which rises in value as yields fall, had produced some interest in issuance.

One said that some investors were optimists “hoping to ride the crest of a wave”, but that long-term investors remained wary about debt sustainability and the possibility of further debt restructuring measures.

The International Monetary Fund has clashed with European creditors over the depth of austerity demanded of Greece, as well as the need for further restructuring of the country’s obligations, something EU officials, particularly those in Berlin, are opposed to.

A swift resolution would potentially allow Greece to have its bonds included in the European Central Bank’s bond-buying programme, known as quantitative easing.