Monday, March 12, 2012

New Greek Bonds, Same Old Doubts?

The Sydney Morning Herald reports, Yields on new Greek bonds spike as swap end:

Greece has implemented the biggest debt writedown in history, swapping the bulk of its privately-held bonds with new ones worth less than half their original value.

Although the exchange will keep Greece solvent and at the receiving end of billions in international rescue loans, markets were underwhelmed amid fears that the country’s debt load remains too heavy.

A statement from the finance ministry said bonds issued under Greek law with a total face value of 177.2 billion euros ($222.6 billion). A smaller batch worth 28.5 billion euros, issued under foreign law or by state enterprises, will be swapped in coming weeks.

New Greek bonds with 30-year maturities issued with yields of 3.65 per cent were trading Monday at a yield of 13.57 per cent, meaning investors were looking for a significant risk premium on their investment.

"This corresponds to our expectations," said Ioannis Sokos, bond strategist at BNP Paribas, while adding that the yield was near Portugal's which was 13.11 per cent in afternoon trading on Monday.

Mr Sokos noted that yields on Portuguese and Greek debt were higher for the short-term in a phenomenon rarely seen on the bond market.

"Greek risk is primarily seen in the short-term," Mr Sokos said.

The debt exchange opens the way for Greece’s second international bailout, expected to be finalised this week by finance ministers from euro-zone nations. It will also transfer the majority of the country’s debt from private into public ownership - its euro-zone partners and the International Monetary Fund.

Jean-Claude Juncker, the prime minister of Luxembourg who is also the main spokesman for the 17 countries that use the euro, said he expects the final approval for the bailout on Wednesday, but indicated that was mainly a matter of procedure.

Without the swap and the 130 billion euros bailout, Greece faced an uncontrolled default on its debts in less than two weeks when a big bond redemption was due.

Though the bond swap will wipe 105 billion euros off Greece’s 368 billion euros debt mountain, giving Athens breathing space to enact more austerity, many analysts think the country’s debt remains unsustainable.

The yields on the new bonds, with maturities of between 11 and 30 years, are trading at rates between 13 and 19 per cent. That indicates that investors think Greece needs to cut its debt a lot more before it can return to markets for funding.

‘‘Markets are telling us that Greece still faces a Herculean task,’’ said Louise Cooper, markets analyst at BGC Partners. ‘‘If the country’s problems were solved by the biggest ever sovereign restructuring ever and the first default in Western Europe for 70 odd years - the last one was Italy in 1940 - then why are the new and shiny bonds trading for the first time today as junk?’’

Late on Monday, at the end of a meeting of eurozone finance ministers in Brussels, Juncker announced the optimistic prediction that Greece’s debt could now decline to 117 per cent of GDP by 2020, less than the 120 per cent that had been expected by debt inspectors in a recent report. Juncker said the new estimate was due to greater-than-expected voluntary participation in the writedown.

This estimate, however, represents a best-case scenario. A previous report from Greece’s international debt inspectors said there is a significant chance that the country’s debt could run far off target if the economy doesn’t return to growth quickly.

Greece succeeded last week in getting the vast majority of its investors to agree to the debt-reduction deal.It got the support of 83.5 per cent of private investors, who will take real losses of more than 70 per cent on their holdings of Greek debt. Of the investors holding bonds governed by Greek law, 85.8 per cent agreed. The deadline for foreign-law bonds - which saw a 69 per cent takeup rate - has been extended to March 23.

Despite the success of the bond swap, the longer-term task facing the country, which is due to hold elections within the next couple of months, is tough. After agreeing to a further batch of harsh reforms to secure new bailout funds, Greece must now implement them.

The list includes cutting 15,000 civil service jobs this year, merging or scrapping dozens of public sector entities, selling off state assets and enacting deep budget cuts. The country must also reorganise its tax, health and judicial systems. Even more austerity measures are expected in June.

‘‘From our side, the target is now the full implementation of the program and of course the return of Greece to growth,’’ Finance Minister Evangelos Venizelos said Monday.

Since the beginning of 2010, Greeks have been clobbered with waves of pension and salary cuts amid constant tax hikes. Reactions have ranged from union-organised strikes and demonstrations - many of which turned violent - to attacks on politicians and disruption of parades. Last year alone, nearly 6000 protests and demonstrations were held nationwide, according to police figures.

On Monday, Prime Minister Lucas Papademos chaired a ministerial meeting on potential violence during independence-day celebrations on March 25.

Charles Forelle of the WSJ reports, New Greek Bonds, Same Old Doubts:

Greece's new government bonds, issued as part of the country's huge debt restructuring, hit the market Monday—and confirmed that few investors think Greek prospects are bright.

Even though the exchange, when fully completed, will cut €100 billion, or about $130 billion, off of Greece's debt stock and lower its interest payments on much of the rest, there is still broad pessimism that Greece will ever pay it all back.

Yields on the new Greek bonds are the highest in the euro zone; the shortest-dated Greek bond, which matures in 11 years, was yielding 18.6% on Monday, according to Tradeweb.

Comparable Italian bonds yielded around 5%, and Spanish bonds a touch more. Bonds of Portugal, the next-most vulnerable country, were around 14%.

The sagging bond prices put Greece deep in the realm of highly speculative investments. Investors think it is more likely than not that their bonds will once again be restructured.

There are several reasons. First, even after this month's debt restructuring, the largest sovereign default in history, Greece's debt will be exceptionally high as a percentage of its economic output. European authorities project, with relatively sunny assumptions, that the figure will be 120% of gross-domestic product in 2020. That is still higher than any other euro-zone country today. Second, the precedent of the restructuring, in which private creditors were forced to exchange and public lenders, such as the other euro-zone countries, weren't, gives many pause that private holders will be at the bottom of the totem pole again in another default.

"Nobody believes that 120% is a sustainable number for Greece," says David Miller of Cheviot Asset Management in London. "Immediately, attention has been paid to the next stage of this, which is, 'When is the next restructuring?' " About the new bonds, he says, "there's no great confidence they'll be around to maturity."

In the bond exchange, creditors received a packet of new Greek securities with a total face value of €31.5 for each €100 of their old bonds. But those new bonds were quoted at around 24% to 25% of face value, according to Tradeweb.

That means investors value the package of new Greek bonds at just €8. More valuable is the €15 in cash-like high-quality bonds issued by the euro zone's bailout fund, which creditors also received.

The bonds' weak prices were no surprise. In the days leading up to the bond swap, as it became clearer that the exchange would go through, old Greek bonds approached levels that implied the weak valuation.

All told, Greece issued €55.8 billion of new Greek debt securities Monday to bondholders who turned in €177.2 billion in old Greek bonds. They also received €30 billion in bailout-fund bonds.

A minority of the bondholders whose bonds were exchanged Monday had resisted the deal, but they were forced to accepted by a change in Greek law that allows a supermajority of holders to bind everyone.

The swap effected Monday takes care of the vast majority of Greek bonds that were up for exchange. An additional €28.3 billion in assorted bonds, among them securities not subject to the changed Greek law, haven't yet been swapped.

Greece says holders of €19.5 billion have already agreed to do so, and it is turning up the pressure on the remaining few.

"The market understands very well that the acceptance of our offer is a unique choice, a smart and profitable choice," Finance Minister Evangelos Venizelos told reporters on his way into a meeting of euro-zone finance ministers in Brussels.

Late Friday, a panel of market participants ruled that the Greek restructuring would trigger credit-default swaps, insurance-like contracts that pay off when a creditor sustains losses. There will be an auction on March 19 to determine how much the contracts will pay; that amount is likely to be around 76 to 78 U.S. cents on the dollar.

As you can see, the Greek experiment is alive and well. I happen to read this as the bond market telling European policymakers that austerity in Greece and elsewhere isn't working and will only ensure colossal failure. Moreover, the bond market is growing increasingly restless, telling European leaders they'd better get serious on tackling the debt crisis by adopting the 'Soros solution', namely, creating a eurobond market backed by Germany. Everything else will be met with skepticism and priced accordingly.

Below, Christine Lagarde, managing director of the International Monetary Fund, on the Greek debt swap, the future of the euro zone and the IMF's upcoming growth forecast for the US. This is an excerpt from her interview with Charlie Rose. Full interview is available here.

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