Shoppers near the Little Metropolis Church in Athens. Greece’s economy has recovered since the dark days of 2012 © Aimee Lee / Alamy
Greece on the mend as debt rehabilitation gathers pace
Investors now see Athens as a safer eurozone bet than Italy
Even in a record-breaking year for global bond markets, Greece stands out. As recently as 2012, investors decided the country’s debt load had spiralled out of control and refused to lend to Athens at any cost.
Now, after a rally that has bewildered many observers, investors pay Greece to borrow on short-term debt. Ten-year bond yields trade at 1.2 per cent — well below the equivalent borrowing cost for the US government. And within the eurozone’s world of low or negative interest rates, Greece is no longer seen as the riskiest bet: this week its yields fell below those of Italy for the first time since 2008.
The market rehabilitation owes much to the gradual healing of Greece’s economy following a brutal slump and a calming of volatile politics, which has taken the possibility of a departure from the eurozone off the table. But external forces have been even more important. Very low yields around the world have driven investors desperate for income into riskier and riskier markets. The torrent of cash flowing into Greece’s undersized bond market has squeezed yields to record lows.
The process began in April 2014, when Greece returned to bond markets just two years after restructuring its debt. Investors were enthusiastic, hoovering up €3bn of new five-year debt at a yield of 4.75 per cent. Some of them bet that private bondholders, now a much smaller slice of Greece’s overall debt, would not be forced to swallow losses again.
I’d have no interest now given yields and spreads. At 20 per cent nobody would touch it, now it’s a screaming buy with retail and local banks chasing it at 1.2 per cent? No thanks Graham Neilson, Fulcrum Asset Management
“After several bailouts over several years and a very painful market restructuring, we felt that the rules of the game had changed,” said Keith Ney of French asset manager Carmignac Gestion, which bought in the 2014 sale. “Once the vast majority of the liabilities were owned and controlled by the official sector . . . we thought any future restructuring wouldn’t involve the private sector.”
Carmignac held on when yields spiked in 2015 as the leftwing Syriza government took Greece to the brink of eurozone exit, and has been buying ever since. It is now the fourth largest private sector holder of Greek bonds, according to fund filings data compiled by Bloomberg.
Mr Ney said his investment thesis still holds today: “We have a long-term view to hold and think there’s still upside from here.” Greece’s credit rating is still three notches inside junk territory. But a recent upgrade to BB- by S&P has fuelled hopes of an eventual path back to investment grade, which would clear the way for the European Central Bank to buy Greek bonds under its recently-revived stimulus programme.
Riding Greece’s bond rally all the way has been profitable. Buying and holding a 10-year bond since April 2014 would have earned investors a total return of 87 per cent. Anyone lucky or shrewd enough to have bought at the height of the 2015 crisis has more than trebled their money.
Some did even better. Achilles Risvas is founder of hedge fund Dromeus Capital, which bought bonds in the low 20s of cents on the dollar in June 2012 after the Greek elections. “Everyone thought we were crazy,” he said. Having held on, he has now made four times his money on the trade. However, he has been reducing his position over the past year or more. “Yields are not reflective of the risks,” he said.
One of these risks is Athens’ still eye-watering €359bn debt pile, or more than 180 per cent of GDP. Still, just €67bn of that is in the hands of investors — most of the rest is long-term loans from EU bailout funds and the IMF which carry very favourable interest rates.
Italy, whose towering debt is 134 per cent of GDP, has to constantly refinance it all on bond markets.
“With Greece, it doesn’t make sense to look at the overall debt to GDP — it’s not clear it really means much,” said Chris Jeffery of Legal & General Investment Management, which holds some Greek debt. Italian debt, by contrast, is subject to a constant “rollover risk”, he added.
As Greek bonds have rallied, its debt agency has had to woo new classes of investors. In April 2014, a third of new bonds were bought by hedge funds, according to Lee Cumbes, head of public sector debt at Barclays.
This year, hedge funds have taken roughly 5 per cent in Greek debt sales. More conservative “long only” asset managers have dominated.
However, even in a world where more than $12.5tn of debt trades at sub-zero yields, some are sceptical about Greece’s apparent transformation into a “normal” bond market.
“I’d have no interest now given yields and spreads,” said Graham Neilson, investment director at Fulcrum Asset Management in London. “At 20 per cent nobody would touch it, now it’s a screaming buy with retail and local banks chasing it at 1.2 per cent? No thanks.”
Source: https://www.ft.com/content/1873add0-020d-11ea-be59-e49b2a136b8d