Rebuilding Bonds With Greece’s New Bailout
Greece is getting a new bailout, and its bonds could yet qualify for ECB buying
Eurozone officials Friday cleared €86 billion ($95 billion) in new loans for Greece. The questions about the viability of the latest program are myriad. Growth assumptions may again be too optimistic, given the damage done to the economy by the summer’s bank closures. Privatization is assumed to produce significant results despite past disappointments. Political risk remains high, with Prime Minister Alexis Tsipras relying on opposition votes to pass the measures needed to unlock the bailout cash. Fresh elections look likely once the dust has settled on the negotiations.
But for Greek bonds, the more important factor may be that the Greek government has shown a commitment to stay in the euro. The biggest risk to private bondholders was an exit from the single currency and a subsequent disorderly default. The debate around debt restructuring that is being promoted by the International Monetary Fund is all about the debt Greece owes to its eurozone peers.
To impose fresh losses on private bondholders would be counterproductive as long as Greece remains in the euro; the ultimate aim of any bailout program should be to return a country to market financing, as has happened with Ireland and Portugal. Private bondholders hold only some 13% of Greece’s outstanding debt; that share will shrink further as cash is disbursed under the third program.
Meanwhile, Greek bonds could yet become eligible for the European Central Bank’s quantitative easing program. Benoît Coeuré, a member of the ECB’s executive board, hinted in an interview last week that this decision could be taken even before a first review of Greece’s progress. ECB buying would be relatively small in scale because of the amount of Greek debt the central bank already holds: Barclays calculates it could buy up to €1.3 billion of bonds after August’s €3.2 billion repayment. But it would still be significant.
And in an odd way, Greek government bonds, due to their idiosyncratic risk, offer some diversity in a market where prices for many instruments are being driven by global macroeconomic concerns such as China. Greek bonds are a bet on Greece, not on external factors.
Greek bonds have already rallied hard: They are up 8% year-to-date, according to Barclays index data, having been down over 40% in July. But two-year bonds still yield just under 10% and are priced well below par. The Greek yield curve remains slightly inverted, with short-dated yields above long-dated yields, a sign of continuing distress. Short-dated bonds should benefit most if Greece manages to stick with its bailout program near term.
Investing in Greek bonds isn’t for the fainthearted; volatility clearly could return. But, with the country steering clear of the abyss, its short-dated bonds again look interesting in a world otherwise starved of yield.