Greece returns to markets at a high cost to taxpayers, after four years out in the cold

European Council. From left to right: Francois Hollande, President of France, Antonis Samaras, Greek Prime Minister, Pedro Passos Coelho, Portuguese Prime Minister, Angela Merkel, German Federal Chancellor. It’s clear that Angela Merkel instructs the Portuguese PM and the Francois Hollande gives directions to the Greek Premier. (Council of the European Union, 20/03/2014).

European Council. From left to right: Francois Hollande, President of France, Antonis Samaras, Greek Prime Minister, Pedro Passos Coelho, Portuguese Prime Minister, Angela Merkel, German Federal Chancellor. It’s clear that Angela Merkel instructs the Portuguese PM and Francois Hollande gives directions to the Greek Premier. (Council of the European Union, 20/03/2014).

The time that Greece has been waiting for, for quite a long time (4 years) is about to come. Athens is now floating in the capital markets a sovereign bond issue of about €2.5 billion and already unofficial offers from investors have reached €16bn. A very hefty multiple coverage so far of 6.4 times. The book of offers officially opened this morning at 9 am GMT and the interest rate is expected to average at around 5%. Judged from  investor’s point of view such a yield is unbelievably high, for an issue which matures in April 2019 that is within the time period during which Greece’s creditworthiness will continue to be more or less guaranteed by Eurozone mechanisms.

A gift to mega Eurozone banks

In short, this bond issue is actually a gift to banks and its 5% interest rate is currently the highest among euro denominated sovereign bond issues. It’s more than obvious that the reasons why the Greek government decided to proceed to this issue are more political and image making than financial. For one thing, the government doesn’t really need the €2.5bn and the interest cost is more than the double Greece currently pays to its official creditors (the other Eurozone governments and the European mechanisms), around 2% .

On top of that, the Greek government in view of the European, regional and municipal May elections wants to change the internal climate in a way that could mark the end of the Brussels managed economy. The Greek internal political opposition has been accusing the EU-IMF dictated economic policies as leading to catastrophe and new dead ends. This bond issue supposedly changes the picture and proves that the severe austerity policies followed for four years now is finally paying dividends. The Greek exit to markets also provides a vindication for other Eurozone governments and more so for Berlin, the main powerhouse behind the austerity policies applied all over Eurozone during the past four years. Greece has been the worst ‘student’ of the German inspired austerity programs.

A politically driven return to markets

In many respects the issue comes at the right time for the Greek government; two days ahead of the scheduled visit of the German Chancellor Angela Merkel and after the political scandal of Takis Baltakos (ex-general secretary of Greek government) and the postponed evaluation of Greece’s economic prospects by the credit rating agency Moody’s. However, the Greek minister of Finance Yiannis Stournaras , stated yesterday that there is no need for rushing things because Greece has its financial needs adequately covered for one more year and is not going to do so only to lull the internal political unrest of the last few days. His exact words were that “Greece is just doing a preliminary test so as to smooth the interest rates”. He also stated that the date that is more likely for Greece’s return is on the 23rd of April when Eurostat will confirm the achievement of the primary surplus.

One would logically wonder, why the statement of Stournaras is so contradictory to reality. What is the most senior Greek government’s minister trying to avoid? Does he want to stabilize the political situation and calm things down?  One thing is certain. The critical issue now is not when Greece is going to come back to the international arena; but why the Greek banks will not participate and how beneficial this will be for the country.

Hefty returns to French and German bankers

The European Central Bank (ECB) stated that it will not let Greek banks buy government bonds and only foreign banks and its customers will have the chance. Why does the ECB follow this strategy at a time when the  Greek banks do not have as much government bonds in their balance sheets as before the crisis? Is it because the ECB wants to cut the umbilical cord between Greek government and banks? This last possibility looks most probable.

At this point, it is important to note that the systemic Greek banks were supposed to buy one-third of the bonds that the Greek government will issue, when returning to markets. However, after they are banned from the issues the field remains open for foreign investors to set interest rates in their favor, by keeping them at higher levels, since there will be no Greek participation to provide a safeguard. In any case, the Greek government has no negotiating ace in their hands in order to reverse that; so they will have to go along with the rules of ECB, at least for the moment.

Ousting Greek banks from the ‘banquet’

Nevertheless, even without the participation of Greek banks, it seems that Greece gradually gains the lost trust of the capital markets. Germany seems to play an important role in this. Der Spiegel refers to the upcoming Greek return to markets as a “realistic miracle”. However, all that cannot be just a coincidence. Merkel is not going to Greece because of the sunny skies. There must be very good political and economic reasons. In this respect, everything points to mutually favourable prospects. The two governments are now ready  to announce their common success in bringing Greece back to its feet and to show that Germany is successfully backing Greece. It seems that the developments are driven more by the political necessities rather than pressing financial needs. And this is not necessarily a negative arrangement. This is not the whole story though.

Merkel gains, Greeks pay

The last thing that Greece, and in particular the Greek citizens, should have in mind next time they will vote in  elections, is the fact that the country will borrow some billion euros on its imminent return to international markets at a high interest rate (around 5% – 5.5%). The early Greek exit to markets may help the Athens and Berlin governments in the next elections, but this will come at a great cost the Greek taxpayer, who is going to pay for the interest (anything between €125 -150 million including hefty commissions) in the not so distant future.

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