Onwards and upwards

And so Greece closes a sorry and humiliating chapter of its history. For years, the Hellenic Republic has made ends meet by accepting whatever money its EU partners deigned to offer. In August, that arrangement formally ended with the conclusion of the third economic adjustment programme. Its future financing will be raised in the markets, and the country could be forgiven for wanting to get on with it, if only to prove to doubters it can stand on its own two feet.

The London-based head of DCM origination at one international bank said: “The market is understandably focused on when Greece will issue but I think this expectation is misplaced. In terms of its cash position, Greece is not under pressure to issue; it is well covered for the foreseeable future. Why should it rush?”

It was a rhetorical question: while its cash position may not make issuance an urgency, internal political pressure does. The government is keen to demonstrate to the electorate that things are returning to normal.

“That pressure shouldn’t be underestimated,” said the banker. “But I think by indicating it is not in a rush it is doing the right thing. The market can be very unforgiving of deals that are mispriced or badly timed. It is important its early transactions perform in the aftermarket, to reinforce that perception that Greece is normalising.”

He added: “Greece will be working towards a medium-term return to a funding strategy that is in line with its eurozone peers. That means issuance driven by predictability, transparency and consistency, using primary dealers, issuing T-bills and bonds via both auctions and syndications.”

In June, eurozone finance ministers had paved the way for this final step, extending maturities and deferring interest on the loans extended by the European Financial Stability Facility amounting to €96.4bn – around 30% of Greece’s outstanding government debt. This included a 10-year extension of the weighted average loan maturity, meaning the average weighted maturity now stands at 42 years. Interest payments due on the loans were deferred by 10 years.

The agreement also provided a cash injection, a buffer to ensure the government can service its debts and has the flexibility to handle any unexpected developments. By reassuring investors that the government is solvent, the buffer should also pave the way for future debt issuance.

But the IMF is concerned the country is still not self-sufficient. It has warned eurozone countries might have to make further concessions due to the added expense of raising capital in the markets. At 228% of GDP, Greek public debt remains sky high, and debt servicing costs could rise as more expensive private debt replaces cheaper official-sector borrowings, the Fund warned.

This process has already started. Greece first returned to the bond markets in the summer of 2017, issuing a €3bn five-year note with a 4.625% coupon – a far higher rate of interest than what Greece pays on its European official-sector loans.

Nevertheless, the DCM originator expects an issue this autumn. Over time, it can freshen up its yield curve, but it can afford to be patient and wait for the right opportunities to do this, he said. “It is important that Greece continues to maintain and active investor relations programme, to build a dialogue with its investors,” he added.

When the opportunity presents itself is likely to be at least partly determined by wider market sentiment. Greek bonds had a relatively good run in the early summer, with yields coming in before pressure on emerging markets generally saw spreads widen significantly.

Outlook improving

But this should not be interpreted as an indictment of Greek fundamentals, which are respectable. The recovery looks relatively well entrenched, with economic activity gathering speed in Q1. Growth came in at 2.3% year-on-year, though it was driven only by external demand, said Jesus Castillo, senior economist at Natixis. While debt is still too high, it has at least been falling. Greece outperformed its targets of 1.75% for the primary balance in 2017, achieving the 3.5% it was required to meet for this year a year early.

Inflation is likely to slow down sharply to 0.7% this year, from 1.1% in 2017, said Castillo, due to sluggish demand and the weaker oil price, but this is still an improvement on the negative 0.8% inflation seen in 2016. Greek banks look a little healthier and are well capitalised, even if the ratio of non-performing loans, at 48.5% in Q1, remains high.

Perhaps most importantly, Greece does not have any significant repayments to worry about until 2030. There has been some speculation that it might look to pay down IMF obligations early, given they have a higher interest rate than the European Stability Mechanism loans, to further ease repayments. But Andrea Colombo, managing director in the EMEA DCM team at JP Morgan said: “Greece could certainly look to optimise its debt profile, but growth is the essential driver for stabilising its market, so the most important thing is to focus on keeping the economy on track.”

These improving indicators have been noted by ratings agencies. Moody’s said its rating on Greece could be upgraded if the government stays on its current track of implementing reforms, and that, conversely, an imminent downgrade is unlikely – unless it deviates from its commitments.

All this should sooth lingering investor concerns. With its own house more or less in order, in the short term, Greece’s biggest concern might be the prospect of being dragged down by external shocks. Sentiment will be influenced by large emerging markets such as Turkey and Argentina and unfolding political developments in the Middle East. Even the hunt for the next ECB governor could cause problematic volatility, as traders ponder the possibility of a change of direction from the stewardship of Mario Draghi.

Perhaps the biggest factor of all will be Italy. “Greek spreads are currently around 130bp over Italy at the long end,” said Colombo. “Italian bonds act as a kind of floor for the performance of Greek bonds, in that it is difficult to see Greece trading inside Italy. So, while there is little direct link between Greece and Italy, if Italian spreads do not tighten, it is unlikely to see Greece spreads grinding significantly tighter.”

However, in the longer term, the same old concerns remain. While 2030 seems distant now, it is unclear how Greece will be in a better position to repay its debts than it is now. Ultimately, EU leaders will have to return to the discussion of debt relief. The hope is that by then it will be easier, politically, for EU member states to forgive Greek debts.

Yvan Mamalet, senior euro economist at Societe Generale, said: “It is important to note that there has already been a significant amount of debt relief, amounting to 40% of loans made by official European creditors. True, it has not been enough from the Greek perspective, and perhaps there should have been relief on the ESM loans, but the EU has made concessions. By the time the next discussions about debt relief come around, maybe the political picture will have changed and it will be able to go further.”

The EU’s position has certainly evolved since the start of the crisis, so there is no reason to doubt it could change further in the next 12 years. Mamalet said: “At the start of the programme, there was definitely too much focus on fiscal consolidation. But the focus has gradually shifted away from austerity towards reform, with the emphasis now on pension and labour market reform, and widening the tax base.”

Greece, for its part, has certainly worked hard to balance the demands of its creditors with the defiance and desperation of its voters, which should be recognised by investors. “We believe the measures that have been taken are satisfactory and should enable a credible return to the capital markets for Greece. In our view, these measures ensure the sustainability of the public debt in the short and medium term,” said Natixis’ Castillo.

But having worked hard to get where it is now, Greece will have to work just as hard to maintain its momentum, as voter calls for increased expenditure grow louder. The main question now is whether Greece can maintain a primary surplus of 3.5% of GDP out to 2022, and then of 2.2% of GDP after that, said Castillo.

The question will not only be asked by investors in determining the price of its debt, but by creditors. It is a reminder that, while Greece’s exit from its assistance programme has been touted as a clean exit, the country remains heavily monitored by its creditors at the ESM and ECB.

If Greece fails to deliver on its promises on reform and spending, it could be pushed back over the economic precipice. In that way, at least, the next chapter in Greece’s history looks like the last one.