When More Wood is Needed to Extinguish the Fire – New Issuing of Greek Bonds

The story of Greece is a well-known one, albeit recently it is being featured more in the headlines because of its faulty finances rather than for its contributions to world history and culture. This Thursday, for the first time since the Euro crisis of 2010, Greece borrowed money from private investors by selling its debt. The Greek government received about €3 Billion for issuing 5 year bonds at an interest rate or yield of 4.75%, the first sale of its kind after the government acknowledged its insolvency 4 years ago.

According to the BBC Greece’s recent bond sale attracted over 500 investors, for a total amount of 3 billion Euros over a span of 5 years, a venture that deputy prime minister Evangelos Venizelos deemed “sustainable”. It is worth highlighting that this is the first time that the Mediterranean nation engages in debt capital markets ever since its near death experience in 2010, when it had to be bailed out by stronger Eurozone partners.

In comparison to the almost 40% interest the market demanded during the peak of its financial crisis, 4.75% almost seems negligible. And that might just be the problem; with the rest of the EU having demonstrated that it will not let Greece go under, Greek bonds will feature higher demand, backed by its more economically successful Eurozone neighbors. While the Greek government is running up the debt to higher amounts, all the long still running a fiscal deficit, Germany’s leading politicians fear yet another Greek bailout on the horizon.

Nevertheless, orders for the newly offered bonds numbered some 20 billion Euros, almost as much as 7 times the initial offering.It seems that investors are looking desperately for “safe” methods of achieving high interest returns, with yields in the US being microscopically low whereas other Eurozone members’ 5 year debt yields average around 1%. The only outlier is Portugal, but it’s now only offering 10 Year bonds at a yield of 3.96% as of 4/14/2014.  Investors must still be reminded that Greek bonds are rated at the bottom scale of the Eurozone, considered as “junk”, or below investment grade, by rating agencies Moody’s (Caa3), Standard and Poor’s and Fitch (B- rating from both).

Greece first came to be financially troubled after it engaged in massive borrowing facilitated by easy credit and the benefits of the financial credibility tied to the Euro. Eventually, Greece’s expenditures aroused suspicions, and investors demanded higher interest rates to offset riskier bonds. Germany later criticized Greece for its profligacy and incursion in unremorseful moral hazard. Merkel’s statements were interpreted as a German refusal to step in to aid a possible Greek default, which ironically pushed Athens to the brink of default when markets demanded higher and higher bond spreads. At the height of the fiscal crisis, Greece alongside its PIGS counterparts, were facing the imminent fallout of a triple blow: a collapse in government revenue due to the recession, a fast increase in spending due to rising unemployment and large stimulus bills, at the cost of adding the toxic private debt onto public sector balance sheets.

The costs for pulling out of the common currency would be extremely punitive. If Greece were to abandon the Euro, despite their country’s limitations (their economy accounts for less than three percent of the EU’s GDP), it has been estimated that they would have to incur on a cost of one trillion euros due to subsequent bankruptcies, capital flight, and new currency adjustment) 

Nevertheless it seems that Greek is on the right track to recovery given last year’s figures showing a primary surplus in finances. In other words, taxation and other revenue-collecting policies managed to cover all government spending except for interest obligations. Notwithstanding, Greece still has enormous amounts of debts to service. Reuters informs that as of today, Greece has a public debt equivalent to 175 percent of its national output.Furthermore, as of January 2014, Greek unemployment remains above 25%. 

Greece received in 2010 desperately needed bailouts from the controversial “troika” – a lending union comprised of the International Monetary Fund, the European Central Bank and the European Commission. However, this monetary help was granted on the condition that Greece reduced its fiscal spending and increased taxes. In other words, Greece was told that in order to survive, it had to tighten its belt and undergo full-on austerity measures. 

Austerity has definitely taken its toll on the Greek citizenry. Greeks have lost about a third of their disposable income and unemployment is at an all-time high that hasn’t been seen for 33 years in the country, with massive layoffs emanating from the public sector due to budget costs. Greeks are increasingly taking to the streets to protest and accusing Germany of being responsible for their woes. Whether or not returning to international capital markets will rescue the Greeks from themselves remains to be proven, but money inflows are generally not something to be frowned upon, as long as they are not spent in a mythological Dionysian fashion.