The ‘Great Stretch’
Last week the Greek government celebrated its return to the bond market, selling 3 billion euros in five-year bonds at a yield of 4.95 percent. Reportedly there was great demand for the issue, which should be no surprise given the current propensity of investors to buy all sorts of junk debt as long as it yields more than just a smidgen.
Reuters report on the backdrop that made this successful auction possible:
“Call it the Great Stretch. Two years ago, Greece’s debt crisis almost brought the euro zone crashing down. Now European partners are preparing to ease Athens’ debt burden without writing off their loans but by stretching them out into the distant future, extending maturities from 30 to 50 years and further cutting some interest rates, EU officials say.
Greece made a successful, if artificially engineered, return to the long-term capital markets last week for the first time since its international bailout in 2010, and just two years after imposing heavy losses on its private creditors.
But with its economy shattered, the country is still a long way from being able to fund itself unassisted in the market. The International Monetary Fund says Greece is likely to need further financial help from the euro zone over the next two years.
One reason why the sale of 3 billion euros in five-year bonds at a yield of 4.95 percent went so smoothly, on the eve of a support visit by German Chancellor Angela Merkel, was that investors are widely anticipating official debt relief.
“That has been quite substantially priced in, and the market is also expecting Greece to be quickly upgraded by the credit rating agencies,” said Alessandro Giansanti, senior rate strategist at ING bank in Amsterdam.
“In a second stage, the market is also expecting a reduction in principal on official debt, and no private sector involvement (write-down) in the coming years,” he said.
Whether such expectations are fully realized will only become clear later this year, when negotiations start with the euro zone and the IMF on Greece’s longer-term funding, and the end of its wrenching bailout program.
But EU leaders share an interest in helping conservative Prime Minister Antonis Samaras’ shaky coalition cling to office rather than seeing leftist anti-bailout firebrand Alexis Tsipras sweep to power demanding a massive debt write-off.â€
In other words, investor expectations regarding the probability of debt reductions and other measures to help the Greek government are quite rational in view of the political situation. There have been numerous polls in recent months that indicate that SYRIZA would win any new election hands down at the moment.
