Greek Bond Offering Raises More than Expected

If one needed more proof that the Greek debt crisis was over, it came during Tuesday's bond sale by the Athens government. Greece had planned auctioning $1.62 billion in debt, but demand was so great that it sold $2 billion. The implication is that the bond traders of the world think Greece is a good investment. While the country still has a huge problem to solve, it is no longer critical that something be done over the week-end. It is the difference between an acute ailment and a chronic one.

In order to keep itself liquid, the Greek government is going to need to borrow $44 billion for the year, and $15.6 billion of it by the end of May. The $2 billion sold yesterday is a step in the right direction, but clearly, Athens needs more. The rates at which it sold the debt are 4.55% and 4.85%. Many experts believe that this is unsustainable for Greece in the medium term.

According to Reuters, the offering broke down as follows: "Investors bid 3.9 billion euros on Tuesday for the 600 million euros of 52-week Treasury bills, the Greek Public Debt Management Agency said, meaning the offer was oversubscribed 6.54 times. An auction of 26-week bills, also seeking 600 million euros, drew bids totaling 4.6 billion euros, for an oversubscription ratio of 7.67. The demand allowed Greece to sell 780 million euros of bills in each auction."

Ioannis Sokos, bond analyst at BNP Paribas in London, told Anthony Faiola of the Washington Post, "This sale was too small to be a major indication of confidence [contradicting the opinion here], but at least there wasn't a negative surprise. But there is no way Greece can keep paying 4.55 percent for the next six months. That is still unsustainably high."

Given that these were 6-month (at 4.55%) and one-year Greek T-bills (which carry the 4.85% rate), they will have to be refinanced in the near future, and that means Greece can get a better deal if it starts getting its fiscal house in order. Failure to do so would mean the 4.55% and 4.85% rate wouldn't be feasible when these bonds are due.

What the finance boys and economists fail to understand about the Greek situation is that politically it will not be allowed to default. Germany's political, economic and financial interests rest on keeping the euro as much like the late, lamented Deutschemark as possible. If Greece were to default, it would be a disaster for the European Project, upon which modern Germany's very identity is built.

For that reason, the EU is offering Greece $40 billion at 5% if it is needed to avert a default. That would take Greece through to the end of the year. The IMF has $20 billion more at even better rates, but that is seen as politically unpalatable in both Athens and Berlin. Nevertheless, Greece has co-signers making their bonds a one-way bet. Where it gets dicey is in addressing the structural problems: ineffective tax collection, wages that exceed the value of the labor, and retirement at ages about a decade too early given the pension funding in Greece. Attacking these could put the people in the streets and the government out the door.

© Copyright 2010 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

Kensington Review Home