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Portuguese bank spoils Greece in the financial markets

11 July 2014 / 15:07:31  GRReporter
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Greece’s first attempt to issue long-term bonds in the financial markets failed. The goal of the Ministry of Finance to obtain 3 billion euro was not achieved due to the temporary negative climate for bonds issued by the euro area peripheral countries. It affected the three-year securities as a result of which Greece was able to obtain only half of the expected amount, 1.5 billion euro, and at a 3.5% interest rate.

The unsuccessful move bothered the Greek Ministry of Finance, as it questioned the ability of the country to meet its capital requirements through the markets and to break its dependence on the borrowings under the support mechanism and the memoranda of financial assistance.

According to the Financial Times, the problem was due to the crisis of Portugal’s Banco Espirito Santo that led to a drop in the investor interest in government bonds of the euro area peripheral countries and in the interest rates offered.

It is worth noting that in the previous issue of Greek government bonds this April, the goal of the Ministry of Finance was to obtain 3 billion euro whereas the bids of foreign investors were seven times higher and reached 20.8 billion euro. In addition, while in April all foreign analysts supported the issue of Greek government bonds this time the positive forecasts for a successful attempt were as many as the negative.

At the same time, by the official announcement of the Ministry of Finance, the Greek government expressed satisfaction as "once again international investors have shown confidence in the Greek economy." A senior representative of the Ministry quoted by the online edition of Naftemporiki, states that the purpose of Greece was not to obtain capital but "to show that we can obtain capital despite the adverse conditions and at good interest though."

The same source believes that, despite the "sense of uncertainty among investors, which ultimately was not local", an integral part of the positive outcome of the auction was the fact that the spread (the difference in the interest rates), compared to that of the Portuguese securities, was 200 basis points lower than in the previous auction in April, when the spread was 240 basis points.

The Greek bonds were bought by Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, Citi, JP Morgan, Morgan Stanley, Nomura, HSBC, UBS and BNP Paribas.

Reuters reports that, concerning the bonds of the euro area peripheral countries, the markets were inhibited by concerns about the sustainability of Portugal’s largest Banco Espirito Santo.

In parallel, Fitch director for Europe Douglas Renwick warns that Greece’s return to the financial markets does not mean that the country has overcome all the difficulties. "The ability of Greece to borrow from capital markets could help it meet its future financial deficits," he told Reuters, adding that there are risks that could jeopardize the implementation of the reforms, such as early elections in 2015.

In connection with the future revision of Greece's credit rating, Renwick said it would depend not only on the economic prospects of the country, but also on the possible reduction of its external debt, which could be agreed by the end of this year or during the next.

Analysts point out that Greece’s unsuccessful attempt to obtain 3 billion euro from the bonds issued on Thursday is indicative of the difficulties of meeting the capital requirements through loans from the financial markets. According to the estimates of the International Monetary Fund, after 2015, the Greek government deficit will amount to 12.6 billion euro and it will have to be met through either the capital markets, or a new loan from the euro area. The Greek cabinet in turn denies this figure, claiming that the government deficit will be lower and it will be able to meet it with loans from the financial markets.

The recent developments however show that, for now, Greece cannot rely on them to meet its requirements. In addition, the behaviour of the markets will probably be quite different if the country decides to meet all of its requirements through loans compared to now, when it relies on loans from the European support mechanism.

At the same time, the funding from capital markets depends on risk factors such as the conditions on them, which are formed on the basis of the value of the loans. This factor however is not present in the loans from the support mechanism, the conditions of which are constant and more favourable compared to those of the market.

According to commentators, yesterday's failed attempt regarding the bond issue confirmed the hesitations of the Fund on the probability of Greece meeting its capital requirements through the financial markets alone.


Tags: EconomyFinancial marketsGreeceGovernment bondsFundingGovernment deficitInternational Monetary Fund
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