Greece, Once in Crisis, Joins Negative-Rates Club

Date : 09/10/2019 @ 18:38
Source : Dow Jones News

Greece, Once in Crisis, Joins Negative-Rates Club

By Avantika Chilkoti and Emese Bartha 

Greece sold debt offering less than 0% for the first time on Wednesday in the latest sign of how far investors will go in a hunt for returns amid a global slump in yields.

The Greek government issued EUR487.5 million ($535.31 million) of three-month debt at a yield of minus-0.02%. At a previous auction for bills with similar maturity on Aug. 7, the rate was 0.095%.

The move reflects a broader shift in European bond markets in recent years, with investors paying governments from Germany and Switzerland to Italy to hold their money as the European Central Bank cuts borrowing costs to bolster economic growth in the region. That also means investors are being forced to take on more risk to generate returns, with Greece long considered the final frontier.

The nation, which emerged in August 2018 from an eight-year international bailout program following a prolonged debt crisis, has been welcomed back into the bond market with strong demand for its debt. The falling borrowing costs in recent months are a sign that Greece is steadily becoming just another eurozone country in investors' eyes, after years when its survival in the common currency was in doubt.

"The general monetary-policy environment, not only in Europe but globally, helps issuers that have more debt on their balance sheet," said Andrey Kuznetsov, senior portfolio manager at Hermes Investment Management. "The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk."

The ECB took its key benchmark further into negative territory last month as it reduced the interest rate by one-tenth of a percentage point, to minus-0.5%. The monetary authority also launched a sweeping package of bond purchases as concerns about the health of the eurozone economy persist, laying the groundwork for an extended period of easy money.

While the Greek government so far has issued only very short-term debt at a negative yield, other European governments are borrowing through longer-dated debt that pays no interest. Germany, for example, sold 30-year debt at a negative yield for the first time in August.

The yield on the government debt has tracked improvements in the Greek economy, suggesting that debtholders are "not as worried they're going to lose money as they were in the past," according to Lefteris Farmakis, a strategist at UBS.

Greece's economy has been growing at around 2% a year lately, but remains deeply depressed after shrinking by over one-quarter during its financial crisis. Under the bailout program, the country was forced to enact drastic fiscal retrenchment in exchange for loans from other eurozone countries and the International Monetary Fund.

The election of a pro-business, center-right government under Prime Minister Kyriakos Mitsotakis this July has further contributed to a sense that normality is returning.

Still, Mr. Mitsotakis's ability to loosen crisis-era austerity by cutting taxes remains constrained by the insistence of Greece's German-led creditors that Athens continue to run budget surpluses.

Doubts remain over the sustainability of Greece's debt in the long term, because its huge, cheap bailout loans from eurozone governments must eventually be replaced with market financing at uncertain cost. Most investors believe Germany and others won't let Greece fall back into a crisis and will delay the loans' repayment if necessary.

"If Greece continues to do well and credit risk continues to go down, you could see rates go even more negative," Mr. Farmakis said.

Greece's first issuance after exiting the bailout program, in January, saw the debt office attract demand in excess of EUR10 billion for a EUR2.5 billion fundraising round.

Wednesday's issuance comes a day after Greece raised EUR1.5 billion from the sale of its existing March 2029 bonds at a yield of 1.50%. That marked a record low cost for its 10-year debt.

"The weak global macro environment combined with monetary-policy easing and bigger demand for fixed income from an aging population means that to deliver the same return, investors have to take on more risk," Mr. Kuznetsov said.

--Marcus Walker contributed to this article.

 

(END) Dow Jones Newswires

October 09, 2019 13:23 ET (17:23 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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