Wednesday, April 23, 2014

Greece Euro 3 billion 5y 4.95% first new bond offering

Greece has sold out its first bond offering a Euro 3 billion priced at 4.95% (coupon) and issued at par. The issue was three times oversubscribed.

Greek unemployment continues to rise -- 27% as of the end of January 2014, with youth unemployment around 58% -- although stats are unreliable because so many in the public service have been fired!

How can the financial market see Greece as an acceptable risk?  The kind of social dislocation we are seeing there is well outside the norm.  Certain parties that are running for office are downright scary (SYRIZA and New Dawn), how can investors make the calculation that this is a good buy?

There are three aspects (at least) that govern bond purchases.  The price (yield) the term and the size. This first Greek bond in many years is certain to become a benchmark offering.  Because it is the first, it will be a benchmark, it will stay "on the run" longer than it normally would -- that means that its offered for sale or purchase by a number of brokers with an attractive bid/offer spread in relatively large chunks.  Anyway, bond buyers have a very short investment horizon; they buy long dated instruments but that are extremely liquid.  In this case, the yield is OK (about 300 bps above the US T-bill rate), and if the expected deflation train doesn't come calling the impact on this bond price will be small because of its short duration.

My guess is that with all the hell that is about to break out in Greece over the next 12 months, (and in Europe too if you believe all the talks of deflation) then buying this bond makes sense. What is happening in the real world is rather appalling and is a real indictment of the European system. Greek politicians have signed a deal with the devil -- they are willing to subject their citizenry to the worse possible hardship so that they can stay in the club, they just want the party to continue a little bit longer.



I love this graph, because it was produced by Europe and it shows a bright future... in fact the grey area is projections based on the ability of the government to generate a surplus.  In reality, Greek 2013 GDP growth was -2.3% and total government deficit is accelerating -- at -12% in 2013 down from -9% in 2012.  Yesterday, the Greek government announced that its 2013 deficit was actually only 2.9% -- if you exclude certain "one off items".  In the same news conference Greek sovereign debt was announced to be Euro 175 billion up from Euro 157 billion in 2012, an 11% increase.  Combining the increased government deficit, the increased debt burden and the contracting GDP and you have an explosive mix.  The ultimate proof that the only driver here is to keep the party going until the Germans say "enough".  Again that is not the most important table.  The fact that the Greek economy continues to contract -- hence its ability to repay its obligations is further reduced:



Here again, the numbers are to the end of 2013.


So what was the asset allocator decision tree:  First he's got to buy some OECD bonds, and he's looking for yield.  He's likely to be European -- Americans have not had a huge appetite for Euro denominated bonds because of the fear that the Euro is a one way bet...eventually.  So he's looking for countries that will be bailed out, and Greece is an easy call.  The Spanish and Portuguese economies are nearly too big to be support by the ECB, but Greece is easy, plus they've been following the program to hell, so for the asset allocator its an easy call:

  1. Europe centric 
  2. Yield is good
  3. Put option to ECB if Greece turns to shit
  4. Maturity is good at 5 years
  5. Liquide


That's how you get a 3x oversubscribed bond! 


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