Wednesday, April 9, 2014

Greek Bond Sale --- "A Hugely Significant Step?"

The Ekathimerini reports that Greece plans to sell 2 BEUR 5-year notes to foreign investors this week. That is quite a feat when considering events of the last few years; no doubt about it! Perhaps even a "hugely significant step", as the Irish Finance Minister is quoted as saying.

Greece pays about 2% (or even less) on bail-out loans. The new 5-year notes are expected to sell at just under 5,5%. That makes for a premium of about 3,5%. Multiplying 2 BEUR x 3,5% results in 70 MEUR surplus interest expense annually. Not the whole world but not a piece of cake, either.

What is that premium for? “It’s very much symbolic,” said Rainer Guntermann, a fixed-income strategist at Commerzbank AG in Frankfurt. "Even though it’s more expensive than the bailout loan it could mark the start of a return to normality.”

Money is a fungible entity, so it can never be said with certainty what borrowed money is used for. Since Greece now has a primary surplus, one can only assume that the 2 BEUR will contribute to paying upcoming interest and principal maturities. As far as I know, the upcoming maturities of principal and interest are due to official lenders (ECB, etc.). In short, money will be borrowed from Peter in order to repay debt owed to Paul. Peter is the private investor who will now get a superb return since he can feel confident that Paul, the official lenders, will pay him out in case Greece cannot. The latter is, of course, my assumption but events over the last years would suggest that it is a fair assumption.

When Warren Buffett invested billions of dollars in Goldman Sachs stock in the midst of the sub-prime crisis, that indeed marked the start of a return to normality for GS. The difference with Greece is that Buffett did not have an explicit and/or implicit pay-back guarantee from the US government. Buffett was gambling of the future of GS and his investment showed that he believed in that future. And, as time went on, other market participants started sharing Buffett's belief. Beliefs reinforce themselves mutually and the herd instinct of financial players swings into full force.

All of this may happen in Greece, too. Or not. Time will tell. The 70 MEUR surplus annual interest expense is a bet on the chance that it will happen. If it does happen, it will have been a good bet. If not, it will have been a waste of money.

There is another difference between GS and Greece. In the case of GS, it is highly unlikely that there will be a management crisis and/or complete management replacement when the company is on a solid recovery track. In the case of Greece, a complete government change cannot at all be ruled out. When GS recovers, there may still be periodic but manageable setbacks. Not much needs to go wrong in Greece and there could be a complete set-back. In that case, Greece would - once again - face a moment of 'sudden stop' as regards foreign funding. Put differently, there is only limited assurance that the return to the markets will be a sustainable one.

To cut a long story short: I would not opt for a return to the markets at this stage. The premium for doing that appears too high when compared to the benefit which might possibly be derived from it. Instead, I would go after cheap bail-out money as long as I can get it and I would do it to the fullest extent possible.


  1. I generally agree with the article: Greece should have waited to borrow from the markets. But elections are approaching and the need for a success story overpowers anything else, including the obvious interests of the country. (Assumimg that this market excursion was not ordered by Ch. Merkel to improve her election success story)
    However there is a phrase that is important:"The difference with Greece is that Buffett did not have an explicit and/or implicit pay-back guarantee
    from the US government." No Greek will ever believe such a thing deep in his heart. If somebody were to defend such a position betwenn Greeks he/she will be considered either naive or having a vested interest (eg our blog author will be considered to have such interest, being a banker). Most Greeks will tell you that somebody (the president?) guaranteed the payback. In actual fact most Greeks will tell you that all markets are politically rigged and they only way to make money in them is to belong to some secret political cabal. The wide gap between this premodern line of thinking and the modern world is striking and at the root of the Greek problem. What make things even more difficult to manage is that Greeks are not obviously premodern. This creates confusion and the feeling (often correct) that Greeks are cheating.
    My opinion?Sloppy, doctrinal thinking all around.It is obvious that large, sensitive, long term financial commitments in turbulent times require
    political guarantees that they will not go south. Not necessarily an explicit or implicit repayment guarantee but lets say some high level inside
    information or the inside track on some important new regulation etc. In my view our blog author is wrong here: there was some payback in this GS decision.However this does not imply that all Buffett investment decisions are politically motivated, as a Greek will immediatelly conclude. My guess is that only a handfull, out of thousands, of Buffett investment decisions were of political nature. Most Greeks also confuse political decisions ("do this Mr Buffett to get me reelected and I will give access to NSA intelligence about the companies you want to invest to") with political considerations ie we will invest in Coca-Cola because, among other things, it will buy us some political kudos. I think this confusion is often deliberate, in order to justify a completely politicised view of the world. If I had to choose digitally between the two doctrines I will side with our blog author anytime, as this doctrine produces wealth and is correct 99,99% percent of the time. However if we are to seriously improve things in our little corner of the globe at least, a healthy dosage of cynicism is required, just not to the extreme levels preferred by Greeks.

  2. The entire issue about being able to borrow from the international markets has no relevance at all for the Greek economy. This is a political game being played by the Samaras government and the German government (aided and abetted by the Troika). Since the markets are being reassured by political structures and not by economic success, the development is merely an affirmation that austerity measures will continue ad infinitum. This also implies that the real economy will continue to deteriorate, that unemployment will further increase, and real standards of living will continue to decline.

    Moreover, since the message is that Greece is caught in a debt trap that nobody has any intention of solving, along with the failure of institutions to protect economic structures, there are precisely no reasons for FDI to increase. On the contrary, I would advise investors to stay away from Greece until the politicians in Greece and Germany have been removed and the economy is allowed to function in a normal manner. That means, of course, debt forgiveness or long-term restructuring. It might also mean exiting the euro -- something the Germans are determined to prevent.

  3. So, Greece has issued the first EURO bonds.