Greece issues new debt and Alan Greenspan’s “Canary in a coalmine”

Yesterday just as I had finished my article on Greece and her debt problems I took a look at the news services and saw that she was planning an issue of a new seven-year bond. For the reasons I stated yesterday I think that is too long a term and yes I am aware that as a longer-term debt management objective it would help Greece if she lengthened the average maturity of its debt. Doing so now is both unnecessarily masochistic and expensive in my view. This is because her shorter-dated bond maturities are cheaper to issue at than her longer dated ones mostly because of the change in the collateral rules at the European Central Bank (ECB) where Greek government debt will be accepted now in return for loans after the end of this year. I think Steve Winwood got it right in one of his songs “While you see a chance take it…”

Something Revealing

Since Greece’s last bond issue we have had two main events.

1. An extension of her austerity programme with around another 2% of Gross Domestic Product (GDP) added to the existing plans.

2. The rescue plan from the Euro zone announced last week.

The result of these? Greece ended up issuing guidance on the same terms that she had for her ten-year government bond issue which came out on March 4th 2010. The guidance price was exactly the same being the mid-swaps price plus 310 basis points. So apart from a slight variance because it was seven-year swaps and not ten-year swaps there is no difference. Greece’s Finance Minister had been quoted on March 16 in the Wall Street Journal

“It’s clear that we are not happy to be paying the kind of mark-ups and spreads that we’re paying at the moment,” he said. “But as we have stated all along it’s a question of rebuilding credibility and it’s very clear now that this credibility is being rebuilt”

Sadly this statement was exposed as being somewhat optimistic at best. After all otherwise the borrowing terms would have improved and of course  the rescue plan from the Euro zone had also been added to the mix after his speech. The grandstanding of politicians has been exposed by market events yet again.

Was the issue a success?

On the simplest level yes it was as Greece got her 5 billion Euros and over the next two months she needs to issue  debt. So the Greek government can continue to function and does not need to phone the International Monetary Fund for a while anyway.

However it came at a very high price. Having established a guidance price shown above of 310 basis points above the mid-swaps rate the bond was issued at 325 basis points over. So somewhere in the negotiations to find buyers Greece found herself having to pay more than an already high price and the coupon for the bond ended up at 5.9%. So rather than cheaper borrowing costs there is an argument that Greece has in fact had to pay slightly more.

International Comparison

I have taken a look at the interest rates on seven-year government debt around Europe to give a relative comparison.

Germany 2.66%, Italy 3.11%,Spain 3.27%, the UK 3.47%,Portugal 3.8%

Think of all the international promises and the austerity plan and then compare Greece’s yields with her peers, I think they remain rather eloquent…..

Market Reaction

Greece’s other government bond yields moved higher yesterday. Her two-year bond rose by more than 0.25% to 5.48% and her ten-year rose to 6.27% leaving the spread over Germany’s ten-year bund at virtually exactly double.

Analysis and Comment

There are plainly problems with yesterdays issue. Greece will have to pay for these for the next seven years. Only the initial objective of raising some cash was achieved.

However something was revealed to me by some research from Deutsche Bank. They have looked at the foreign holdings of what they quaintly call Hellenic Republic bonds over the last five years. Over this period the foreign holdings of such debt has steadily risen. It now stands according to them at 75% of the issued stock or just under 220 billion Euros.

Now imagine a scenario where the austerity programme in Greece hits difficulty. Not that hard to imagine is it? For example there has been a report from Goldman Sachs questioning Greece’s methodology in calculating its fiscal deficit and stating that it believes it could be as high as 16% of GDP this year. So in such a difficult situation it is bound to occur to someone that if 75% of her government bonds are held by foreigners then default may not be so painful after all.

Foreign investors will I think become more and more aware of this. This factor was probably a big reason behind the change in the ECB’s collateral rules (although they would never admit it). Except even if Greek banks and individuals start to buy more of their own government debt foreign investors will remain exposed to a large sum.

In fact if Greece was to really play the game in a rather cynical fashion she could drive as hard a bargain as she can for foreign aid and help particularly from the Euro zone but also the IMF. Then after a suitable delay she could default knowing that 75% of her government bond market is held by foreigners. Put that way it may start to sound tempting…….

The Canary in the Coalmine

Over the last two weeks something rather significant has developed. It involves government bond markets and has been particularly prevalent in the UK and the US. You see over what are benchmark bond maturities it is now possible for private companies to borrow more cheaply than AAA rated governments. This began late in 2008 for the 30 year maturity in the US and was related to the crisis caused by the failure of Lehman Brothers. Now apart from people like me not many bother with looking at things like that except it has been joined by its ten-year cousin which is much more actively followed. So American ten-year US Treasury Bonds now yield more than the ten-year swap rate and what is now called the swaps rate is therefore negative.

Now there are market disturbances which may be influencing this, for example the US Federal Reserve stops buying mortgage-backed securities today and financial markets are not in a “normal” state. However it could also be a harbinger of trouble ahead, remember 2007 when one or two other signals began to tell us that something was afoot? One thing is sure sovereign governments have a lot of debt to sell over the next few years.

On the subject of economics it also poses a question as many economic models rely on a “risk-free” interest rate. This would normally be considered to be US Treasury yields but currently due to the events described above it cannot be. As I have written many times before slavish adherence to economic models in this time of economic disruption is tantamount to foolishness in my view. The “risk-free” interest rate was always an illusion but some still prefer illusions to the real world.

Chancellors Debate and UK GDP figures

Whilst an innovation and well done to Channel 4 for showing it, we actually learnt very little. The most respected of the 3 prospective Chancellors before and after the programme was/is probably Vince Cable. As to the very real difficulties the UK will face going forward there was very little real debate which is a shame. It has happened before that economic issues have got submerged in an election campaign,1992 for example, but it is not good.

I see that todays UK GDP figures are being reported incorrectly in some places so I thought that I would quote from the Office of National Statistics to put this right as the figures in fact show us coming slightly more quickly out of a recession which was deeper then previously thought. As time goes by these numbers will probably be revised further.

The movement in GDP in 2009 quarter four has been revised up to show a rise of 0.4 per cent from a rise of 0.3 per cent. The second quarter of 2009 has been revised down to show a fall of 0.7 per cent, from a fall of 0.6 per cent.



9 thoughts on “Greece issues new debt and Alan Greenspan’s “Canary in a coalmine”

  1. I understand, also, that the bond issue was not massively oversubscribed, suggesting that the market is beginning to tire of Greek debt. Your point about 75% foreign ownership of existing debt and the failure of the EU rescue package to reduce the interest demanded on this latest bond issue suggests that there are some nervous foreign investors out there, and probably with good cause.

  2. I wonder if ‘we’ had managed to ban trading in CDS whether these bonds would have been sold.I seriously doubt whether any of the purchasers took part in the auction without having mitigated risk or were acting under duress in some way.

    Would anyone here be brave enough buy these bonds for the yield?

  3. No Andy I for one certainly would not buy Greek Bonds at the current yield, and have not!

    “The most respected of the 3 prospective Chancellors before and after the programme was/is probably Vince Cable. ” That depends upon exactly what is meant by “respected”, I would suggest. He has made a number of serious faux pas in public, which seem to me to demonstrate that he has areas with a complete absence of economic understanding, particularly in respect of the interactive effects of actions taken in an Economy. One of these blind spots of course was his declared idea of a “Mansion Tax”, in which he had clearly not understood that property values are not the same, for the same class of property, throughout the whole of the UK! So for example, some quite normal un-wealthy individuals had purchased basic terraced houses in London some while ago, which now with significantly rising values had exceeded a present market value of £1million. In all seriousness he evidently thought they should now be taxed on the same basis as a true £1million mansion in say Wales or Durham!

    Fortunately, there is no chance of a Liberal Democrat government anyway, so it is all hot-air.

  4. Shaun,it’s interesting to note that the Irish Bank property bailout scheme has taken property loans off bank books at nearly a 50% discount. These properties were both Irish and UK and it’s not unfair to say that Irish Bank practises were not dissimilar to likes of HBOS.

    Would you be prepared to put together a piece of this?

    Two questions come to mind
    (i) How much help is the UK giving to Ireland as we pursue policies hell bent on trying to prop up real estate values?
    (ii) Are these bailout levels indicative of further capital stresses to the likes of Lloyds on their commercial property portfolio?

    • Hi Andy

      There is a lot to consider out of this. Firstly for Ireland as a country who has responded well to her crisis but there are serious implications for her as a country out of this deal. I used to deal with many Irish institutions and remember the heady days of the opening of the tax-free district in Dublin etc. And now it has all come to this. A friend rang me as he was walking home earlier on his commute and he was in Park Lane and I did point out he was passing land now owned by Ireland’s NAMA!
      As to our own property values I feel that residential property is looking like a bubble and commercial property has rallied too quickly a bit like the equity market (QE?). I have noticed not just the pro-Labour commentators talking of us soon being able to make a profit out of our bank stakes. I felt that they were at best premature and were also showing signs of incomplete arithmetic. So there is much to consider here too.

      • I agree that QE money has to manifest itself somewhere! As for house prices we are still in La La land. Wake me up when average wage x3.5 buys the average house and for that to happen they will have to dip lower for a time. If that is a sustainable rate, and I believe it is, looks to be about 50% overpriced at the moment. It would seem the ephemeral nature of house prices are being manipulated by agents in the first instance, our own blind faith in self worth and government who includes them to measure the wealth of the nation. The fact that we now have the attention span of a gnat and if something doesn’t fit into a 5 minute segment in a 30minute news break it isn’t even mentioned, doesn’t help!

        • Whilst I am an indirect beneficiary (I have no plans to move or sell) property prices in my area concern me. I am watching one quite near to me because if it sells at its offer price it is virtually the 2007 peak. This in my view is unhealthy particularly when combined with the lack of volume/liquidity. My update today is more on commercial property which again has rallied but now will have to face the implications of what is happening in Ireland.

  5. The Cable Guy flips and flops when it suits him. Some of his market calls during the Crunch were truly awful. I personally don’t rate the guy at all, not that I rate the other two.

    We are bereft of intellectual heavyweights.

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