Greece Dives Back Into the Bond Market

http://www.nytimes.com/2014/04/10/business/international/greece-dives-back-into-the-bond-market.html

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ATHENS — Europe’s leaders have been preaching austerity for years, arguing that only deep budget cuts will revive the economy and inspire the necessary confidence among investors.

Now, they have symbolic proof, as Greece returns to the capital markets with plans to begin selling long-term bonds on Thursday.

The deal represents a major milestone for the country, which was effectively shut out of the markets in 2010 when the debt crisis left it dependent on international bailouts to stay afloat. Chancellor Angela Merkel of Germany, who more than any other leader is associated with European austerity, is scheduled to arrive in Athens on Friday to affirm that the government is on the right path.

The bond sale reflects increased optimism that Greece and other wobbly euro zone countries have turned a corner. In recent months, borrowing costs dropped significantly for Ireland, Portugal, Spain and Italy, as the investors deemed them less risky.

But the restored stability in the financial markets won’t settle the debate over whether the benefits of austerity are worth the costs.

Greece, like many of its peers, still faces rampant joblessness and deep economic fissures. Unemployment is staggeringly high at 27 percent. On Wednesday, the streets of Athens were again clogged with protesters, denouncing years of budget cuts and steep declines in their standard of living.

"This is our answer to the dead-end policies that have squeezed workers and made Greek people miserable,” the Greek private workers’ union G.S.E.E. said in a statement as thousands of protesters gathered in front of the Greek Parliament. “We are striking and fighting to put an end to austerity."

The still-fragile economic situation in Europe has not deterred investors.

The bonds of both Portugal and Ireland have been in strong demand since those countries returned to the markets earlier this year. Ireland plans to raise a fresh 1 billion euros from international bond investors on Thursday, the second such move since the country exited its international bailout in December.

In part, investors are chasing yield, as the bonds’ rates are more attractive than those available from more prosperous countries like Germany. Portugal’s 10-year bond is currently offering investors a yield of nearly 3.9 percent, compared with less than 1.6 percent on Germany’s equivalent bond.

Investors are also energized by a pledge from the European Central Bank’s president, Mario Draghi, to do “whatever it takes” to prevent the crisis from breaking out anew. With such assurances, investors are more comfortable taking what might otherwise be perceived as a risky bet.

As a result, borrowing costs among the most troubled euro zone economies have been falling fast. At the height of the crisis, investors were demanding more than 30 percent for 10-year Greek bonds. Now, it is less than 6 percent. The interest rate on the new five-year bonds is expected to be about 5 to 5.5 percent, according to Greek media reports.

“Austerity has benefited the financial markets, there’s no doubt about that,” said Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. Austerity has been “part of the price its creditors have demanded politically for supporting it, and it is that support that is actually now enabling Greece to come back to the markets.”

Mr. Kirkegaard added that creditors had helped the country stay in the euro, which has been enormously beneficial for the average Greek. “Had there been no troika program and Greece left the euro, the situation would be much worse than it is today,” he said, referring to the three main international lenders that have given Greece 240 billion euros, or $332 billion, in bailout loans.

“So in that sense austerity required by Greece’s creditors has saved Greeks from a much worse fate,” Mr. Kirkegaard said, “even if it hasn’t maintained their living standards at precrisis levels.”

A spokesman for Ms. Merkel acknowledged the Greek public’s pain but tried to cast things in a positive light ahead of her Friday visit. “The chancellor has repeatedly said publicly how much she admires the path taken by the Greeks and how aware she is that this was a difficult path for many people in Greece, but one that is now showing results,” said the spokesman, Steffen Seibert.

The government has labored to improve Greece’s international image since the country accepted an international rescue package in 2010, and again in 2012, in the face of worries that Greece might need to leave the 18-nation club of E.U. member countries that use the euro.

Such fears are gone. The economy is stabilizing, with the International Monetary Fund recently raising its forecast for growth this year, to 0.6 percent. Greece has met a number of fiscal targets, and the government recently announced a primary surplus — a surplus before debt payments — of about €2.5 billion. The government said it planned to return nearly three-quarters of that to Greeks hit hardest by the austerity measures.

Since it had to seek bailouts, the Greek government has made do on its short-term financing needs with auctions of short-term debt. On Tuesday, it sold €1.3 billion in six-month Treasury bills at just above 3 percent, a rate the Finance Ministry said confirmed “the improved economic and investment climate in our country.” In 2011 and 2012, six-month bills had sold for as much as 5 percent.

But Greece still has numerous economic hurdles to overcome, including a mountain of debt that will take decades to repay. Where the country will find the resources is unclear.

Returning to the markets complicates the situation in some ways. Greece’s debt load — about €320 billion — will continue to grow. And borrowing costs are higher than those on its bailout loans, which charge only around 3 percent interest.

Economists said Greece would need annual economic growth of nearly 5 percent over the next decade to make progress in paying off what it owes creditors. Foreign investment has been returning to the country, but not nearly at the pace needed to stoke jobs and growth.

Efforts to privatize state assets to raise cash to repay bailout funds have continued to fall short. Recently, the government cut its 2014 target to €1.5 billion from €3.56 billion.

Greece also needs an export-driven recovery. But exports fell 0.2 percent last year; excluding oil products, exports fell more than 2 percent. And banks are still not lending into the economy, squeezing credit for small and medium-size businesses, thousands of which continue to close across the country.

“People should be wary of jumping on the bandwagon that a Greek success story is underway,” said Jens Bastian, an economist who was a member of the European Commission’s task force for Greece until last year.