Bond markets cannot get enough of Greece, as debt auction proves
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Version 0 of 1. Take a country where the economy has shrunk by a quarter over the past five years. Add an unemployment rate of 26.7%. Stir in a debt to GDP ratio of 175%. And what do you have? A country that the bond markets can't get enough of, if the debt auction in Greece is anything to go by. Put simply, the sale of €3bn of Greek bonds smashed expectations. Not only was the offer eight times oversubscribed, the yield on the bonds was just under 5%, far lower than the authorities in Athens could have imagined. All a far cry from the days, not so long ago, when Greece was the pariah of the financial markets. The Greek government, unsurprisingly, was cock-a-hoop. It saw demand for the bonds as a massive vote of confidence. Which, in a way, they are. Cutting wages and the generosity of the welfare state has made Greece more competitive through a brutal internal devaluation. The country's creditors have restructured loans to make servicing the national debt relatively cheap. Further debt relief is in the pipeline and there is always Mario Draghi's European Central Bank as a backstop should things get a bit choppy. The prospect of a Greek default has receded while a break-up of the euro is no longer considered a realistic threat. But even allowing for all that, investors are taking on a lot of risk. One successful bond issue cannot disguise the fact that Greece is a deeply troubled country suffering from austerity fatigue and still only in the very early stages of recovery. Investors with longer memories recall that the love affair of investors for post-crisis Argentina a decade or so ago did not last. What's more, the wider eurozone is handicapped by weak growth, high unemployment and heavily indebted banks. The financial fragility of the European banking system was detailed fully by the International Monetary Fund earlier this week. Bottom line: the yield on the Greek bonds should have been considerably higher – at least a full percentage point – in order to reflect the riskiness of the investment. Athens should consider getting away as much debt as it can while the going is good. Or, to put it another way, before the bubble bursts. |