Greek
Bonds. Value or junk?
The European periphery bond markets
have suffered a lot with the adventures of the Portuguese government. Investors
tend to dump periphery bonds en masse without examining the finer details. Let
me explain what I mean. Greece is in the final stages of its fiscal adjustment.
In 2014 it would most probably post a primary surplus. Furthermore Greece has
done its PSI. Bonds have been haircut by more than 75% (in NPV terms). By
contrast neither Portugal nor any other southern country is anywhere near addressing
their debt imbalances. Their PSI’s are ahead, whereas the Greek one is behind.
Moreover, Greece would largely complete the recapitalization of its banks in
the next few days and although they are far from pinnacles of health they too
are in their closing cycles. By contrast, banks in Spain, Portugal or Italy are
at the beginning of the process.
Then there are also the
technicalities of the Greek bonds.
·
The
majority of the Greek debt (except the ECB holdings) is under English law and
thus cannot be restructured by simple act of parliament. By contrast, the
majority of bonds from other countries is under local law and thus amenable to “voluntarily
restructure, roll over or change”.
·
The
new Greek bonds have, cross default
·
Pari
Passu with EFSF loans
·
Sovereign
immunity waiver
·
Negative
pledge
·
Tax
gross up
In other words, the Greek bonds
are much safer than most other periphery bonds. But there are also some trading
technicalities that should be noted.
·
After
last year’s buyback the available stock of bonds is around 34billion. This
represents 10% of the total Greek debt. To impose a moratorium on these and
suffer the legal complications would be imprudent.
·
These
bonds carry a 2% coupon. Thus servicing them only takes 0.4% of GDP.
·
Greek
banks own small amounts of this 34billion since they were arm twisted into
giving them to the buy back. Actually this last observation is very important
now that the Greek banks complete their recapitalization projects.
If you were a Greek bank, recapitalized
and with money to buy assets, where would you invest. In Greek bonds, yielding
close to 11-12% for the next 10-20years or to loans. This is no brainer; Greek
banks are natural buyers and supporters of the GGB market. Thus they appear to
be much safer than other periphery bonds. The Portuguese bonds for example is
another story. With 23billion in the vaults of the ECB and under the SMP
immunity, any restructuring would be painful.
Hot
summer?
If we are to believe the Greek government
next week is going to be a monumental one. After 3 year of procrastination and
playing the cat and mouse game with the Troika the first public sector job
losses would materialize. The law requires few thousands to be “moved” or made
redundant. Unfortunately, as it is usually the case in Greece, the job losses
would not take into account skills or needs but would be a horizontal cut
implemented in the lowest paid jobs.
In any case, this is a
precondition for Greece to receive the next installment of the installment. Greece
gets the next installment due, in a series of sub-installments. Troika decided
that since not much has been done since their last visit (cat and mouse game)
they should break the installment.
Firing public sector workers is
total anathema in Greece (as I guess is in most EU countries with the exception
of France were it is the ultimate sin). All of Greece’s job losses have come from
the private sector so far. In theory, this action should command widespread
rebellion, but as temperatures hit 30 degrees burning Athens does not bring an
advantage. Politicians on both coalition parties know that they have to support
the bill otherwise they will lose their parliamentary seats. So far they have
lost the respect of the people and cannot afford a quiet lunch out, without
being heckled or harassed. But losing their parliamentary privileges is a step
too far. So, one should expect the usual big words of defiance followed by submission
to personal survival instinct.
In other words, the summer would
be hot in Greece as it is always is with little further increase in local
entropy.
Funding
gaps
Also in the news were reports of
funding holes in the Troika program. These reports should be seen more in the
light of internal Troika politics rather than a series threat to Greece. It is
true that tax receipts are lacking in Greece and the depression is deeper than
originally thought but the difference of a couple of billion hardly warrants
panic. As the German elections are approaching the interesting parties (ECB,
EU, IMF) position themselves to extract political concessions now that the
German government is impotent.
