Rob Davies: Big problem, wrong solution

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Petros Christodoulou, the new head of Greece’s Public Debt Management Agency, has the unenviable job of getting investors to part with €53 billion to purchase all the bonds Greece needs to sell this year.

His task has been made harder by the sour taste the agency’s €8 billion five-year bond in January left in the mouths of many investors. While initially offered at a spread of around 380 basis points over mid-swaps, when that attracted a €25 billion order book, Greece cut the launch spread by 30bp.

Normally, if a borrower can get away with cutting its borrowing costs, all power to it. But these are not normal circumstances, and it might have been more prudent for Greece to keep investors on side considering how much it needs to raise.

According to reports, negative sentiment caused Greece to put back plans to sell a 10-year bond in February until March. When that deal comes to market, investors will want to be properly compensated, meaning the coupon could be closer to 7%. Unless the government is able to drastically slash costs and/or raise its revenues, such a high level of interest could make it increasingly difficult for Greece to service its debt.

However, much has changed since Greece tapped the market in January. A public – albeit vague – declaration of support by the European Union last month suggests stronger Eurozone economies will step in to save Greece from default. If rumours are to be believed, EU support will not come in the form of direct funding but from Europe’s strongest economies, France and Germany, coercing state-owned banks to purchase or guarantee Greek government bonds.

It is easy to see how Greece would benefit: both options would allow it to issue debt at a level of interest well below what investors are willing to pay. And for Eurozone governments, it avoids the politically sensitive issue of having to justify why they are bailing out a weaker EU member when the recovery is still fragile.

Even so, it is staggering anyone thinks it is wise to encourage (or force) state-owned entities to take highly risky assets onto their balance sheets after what happened in the financial crisis. The German Landesbanks, for example, are still coming to terms with the costly mistake – of their own making – of investing in highly rated structured credit assets. Repeating the error, with government backing, would be unforgivable.

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