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Greece Trumpets Return to International Bond Market Taking Risk, Investors Snap Up Once-Shunned Greek Debt
(about 7 hours later)
ATHENS — Greece’s return to the financial markets with a five-year bond offering on Thursday was met with overwhelming demand from investors, and government officials hailed the sale as proof that the country was recovering from a wrenching five-year economic crisis. ATHENS — Investors shunned Greek bonds at the height of the European economic crisis, fearful that the region’s sickest nation would collapse from its financial woes.
Greece raised 3 billion euros, or about $4.2 billion, on an offering that attracted more than €20 billion in orders, the government said. The majority of buyers were foreign pension and investment funds, which received a 4.75 percent interest rate on the bonds. But on Thursday, pension funds, banks and other big money managers were snapping up billions of dollars of new Greek debt and trying to get their hands on even more.
The relatively low rate signaled a degree of renewed confidence in a country that only a few years ago was on the verge of exiting the 18-nation euro zone and saw the rates on its 10-year bonds exceed 30 percent. Ireland and Portugal, which also received international bailouts in the crisis, returned to financial markets this year. Greece’s return to the bond market after four long years adds to the growing optimism that the most troubled nations in the euro zone are finally recovering from a wrenching downturn. But in their rush to profit, investors are putting aside the still fragile economic situation and rampant joblessness that continue to plague Greece and others.
But in many ways, the sale on Thursday was an offer that was difficult for investors to pass up. With bond yields low in many other countries, investors will get an attractive return, with little reason to fear that Greece will not pay them back. The disconnect reflects the near-insatiable appetite for higher-paying investments around the globe. With interest rates at record lows, investors are aggressively hunting for returns wherever they can find them, even if risks abound. While Greece sold $4.2 billion of bonds on Thursday, demand for the debt was five times that amount.
The finance minister, Yannis Stournaras, described the move as “a catalytic undertaking,” adding that Greece had made “the biggest fiscal adjustment ever recorded since World War II,” in a bid to mend its finances and restore its global standing. “Investors don’t look to the long-term health of economies,” said Simon Tilford, the deputy director of the Center for European Reform in London. They are looking at whether they can extract gains “without losing their shirts. At the moment, they figure they can, but that doesn’t tell us much about the sustainability of the euro zone or whether governments have taken it on a path to sounder footing.”
But in a reminder of the nation’s underlying fragility, a car bomb was detonated outside the Greek central bank just hours before the bond announcement, shaking buildings for blocks around but causing no injuries. Investors may be playing a dicey game, but in the case of Greece and other shaky euro zone countries, they have been assuaged by the belief that the European financial machine will kick into gear should anything go wrong. European Central Bank President Mario Draghi has pledged to do “whatever it takes” to keep the crisis from reigniting.
No one immediately claimed responsibility for the bomb, which blew out windows, leaving intact only two wheels and the axle of the car. But a government spokesman said the intention was clear. “The evident target of the attackers is to change this image, and change the agenda,” Simos Kedikoglou, the spokesman, said on a morning television news program. “We will not allow the attackers to achieve their aim.” Such assurances have been reflected in the lower and lower yields that investors have been willing to accept, even for less-than-stellar economies or companies. At the height of the crisis, the rate on 10-year Greek bonds exceeded 30 percent; now, it is less than 6 percent. The rate on the new five-year bonds in Greece was 4.75 percent. Last week, Spain’s five-year borrowing costs briefly dipped below comparable United States Treasuries.
A day earlier, around 20,000 demonstrators gathered near the Parliament building to protest tax increases and spending cuts that Greece’s lenders have required in exchange for the bailouts. Many decried the bond issue as irrelevant for most Greeks, who have struggled financially under the austerity measures. “People must be really desperate for yield, which is what this is all about,” said Carl Weinberg, chief economist of High Frequency Economics.
For the Greek government, which owes creditors more than €240 billion from two bailouts, the bond offer was an opportunity to show that the country is taking steps toward recovery, even if that will be a long and painful road. Investors, though, seem to have forgotten that private bondholders absorbed huge losses from Greece’s partial default in 2012 — losses that the E.C.B. refused to share. “People might suspect there is an implicit or even an explicit guarantee behind these bonds,” Mr. Weinberg said. While European leaders have shown they are unwilling to let Greece fail, they have also demonstrated that “they are willing to skin the private investors to keep Greece from failing,” he said.
A deep recession has reduced the Greek economy by more than a quarter of its size from five years ago. And unemployment is at a staggeringly high 27 percent, though data released by the Hellenic Statistical Authority on Thursday suggested joblessness was easing slightly, dipping to 26.7 percent in January from 27.2 percent a month earlier. The Greek economic situation also remains weak. Unemployment is a staggering 27 percent, and growth is essentially stagnant. As if to underscore the fragile situation, a car bomb exploded outside the country’s central bank here on Thursday, in yet another expression of the populist anger that has punctuated the country’s economic woes.
Not everyone was tantalized by the Greek offer, however. Fadi Zaher, the head of bonds and currencies at Kleinwort Benson in London, said his group refrained from buying because of lingering concerns over Greece’s poor economic health and a mountain of debt that has risen to more than 170 percent of gross domestic product. Fadi Zaher, the head of bonds and currencies at the investment house Kleinwort Benson in London, said his group had stayed on the sidelines of the Greek bond frenzy over lingering concerns about the country’s poor economic health and its mountain of debt that has risen to more than 170 percent of gross domestic product.
“There is a euphoria right now over the euro area, and that euphoria is creating confidence around Greece,” he said. “We are cautiously optimistic about the story, but looking over the longer term we are very, very cautious about it.” “There is a euphoria right now over the euro area, and that euphoria is creating confidence around Greece,” Mr. Zaher said. “We are cautiously optimistic about the story, but looking over the longer term we are very, very cautious about it.”
In a televised statement, Prime Minister Antonis Samaras said the strong demand for the bonds was “a sign of trust in the Greek economy and its ability to overcome the crisis.” Such concerns are broadly echoed by global regulators, policy makers and economists who are increasingly concerned about investors’ willingness to buy risky bonds around the world. The International Monetary Fund and the Institute of International Finance, which closely track global investment flows, both warned separately this week that the bond-buying binge could come to a dangerous end, as the United States Federal Reserve pulls back on its stimulus efforts and starts to raise interest rates. Those on the front lines, the central bank governors in emerging markets, have been among the most vocal about their concerns. When the United States starts to raise rates, the fear is that much of the money that has been chasing higher returns in countries from Greece to Brazil will make its retreat.
He added that the Greek authorities had “paved the way for cheaper borrowing in the future” and that although there was “a long way to go to definitively exit the crisis,” the outlook was improving. “There are vulnerabilities in emerging markets, but there is also a lot of risk taking in developed markets,” said Agustin Carstens, the head of Mexico’s central bank, at a conference on Thursday at the IMF meetings in Washington. “That can hurt us later on.”
The prime minister thanked lawmakers in the governing coalition for having backed tough austerity measures despite their political cost, and Greek citizens for their sacrifices. “Today, Greeks feel greater faith in themselves and in the future,” he said. Because global investors tend to move in unison, said Raghuram Rajan, the governor of India’s central bank, the consequences can be dire when they abandon a particular market — even for developing economies that are in relatively decent shape like Mexico and India.
But Bert Van Roosebeke, the head of financial regulation and markets at the Center for European Policy in Freiburg, Germany, said that it was “not entirely true” to say the bond offer proved a success for Greece. “The Fed needs to be more sensitive to the conditions in emerging markets,” said Mr. Rajan, a prominent international economist who has just taken on his new role. “What if there are $200 billion in outflows in a month,” he asked. “Will the Fed be sensitive to this?”
“The true winners who are profiting from today’s exercise are the banks, pension funds and insurance funds,” he said. “They are getting nearly a 5 percent yield, and there is very little risk that Greece won’t pay back the money.” To date, there has been no wholesale investment exodus, despite turmoil in emerging markets in January. In recent weeks, global investors have continued to snap up high-yielding bonds from riskier nations in the euro zone and emerging markets, figuring the Federal Reserve won’t raise rates until mid-2015.
Two years ago, at the height of Greece’s crisis, the government forced bondholders to take a loss of almost 75 percent on the Greek sovereign debt they had purchased. So rattling was the experience that the International Monetary Fund and the European Stability Mechanism, a financial backstop that was set up to help prevent the euro zone crisis from spinning out of control, agreed that private bondholders would not be subjected to the same fate in the future. Just this week, the state-run Oil India tapped the bond markets for the first time, selling $1 billion of debt.
Instead, they effectively agreed to move the risks of any future sovereign debt defaults to taxpayers in euro zone countries. The president of the European Central Bank, Mario Draghi, has also helped by pledging to do “whatever it takes” to stabilize the euro crisis. Among the most successful recent deals was one from Pakistan, which sold a higher-than-expected $2 billion worth of bonds to a slate of blue-chip mutual funds. After seven years in bond market exile, the deal was a triumph.
The issue of who pays the check if Greece’s finances do not improve in the five years it will take to pay off the bonds is an important one, Mr. Van Roosebeke noted. “It’s the taxpayers in other euro zone countries.” “I wanted to put Pakistan back on the bond market map,” said the country’s finance minister, Mohammad Ishaq Dar. “This deal shows that we are committed to economic reform.”
That hedge and mutual funds should be scrambling to buy such bonds in many ways exemplifies the new reality investors see. And these bets may prove smart, as long as the money continues to pour into these markets.
In Greece, officials declared victory. Yannis Stournaras, the finance minister, said the nation had made “the biggest fiscal adjustment ever recorded since World War II” in a bid to mend its finances. The prime minister, Antonis Samaras, said in a televised statement that the strong demand for the bonds was “a sign of trust in the Greek economy and its ability to overcome the crisis.”