Friday, December 15, 2017

Greek Bonds And The IMF (Plus A Note On Banks)

Greek Government Bonds (GGBs) have been this year's fixed income star performers.  In the past 12 months the 10-year benchmark GGB has rallied impressively from 8% to 4.15% as public finances consistently exceed targets and the economy shows signs of solid and sustainable growth.  

A recent bond swap consolidated many smaller issues into fewer benchmarks and added liquidity to the secondary market, prompting more institutional investors to participate.  Most transactions now take place over the counter therefore volume data are not readily available, but the Bank of Greece has its own trade platform where  volume in just the first week of December is already 2.5 times higher than the average monthly volume for all of 2017.

The shorter end of the yield curve has benefited the most from the rally: 2-year GGBs now yield 1.99%, a level that is  below Greece's overall weighted average cost of funding at the end of 2016. 

While loans from Greece's European official sector lenders (ESM, etc) carry very low interest rates and have long maturities, the IMF's loan facility of around 11 billion euro costs 3.5% and has a much shorter weighted average maturity, around 2.5 years.  Its maturities are staggered every few months, with the last being in 2024.  

Therefore, it is becoming increasingly possible for Greece to repay the IMF early and lower its annual interest costs substantially, through a carefully balanced issue of new short and medium term bonds (2-5 years).  Total face amount of debt would remain the same, but lower annual interest payments reduces its net present value, resulting in a credit positive event.

Why is this important, if it were to happen?

Firstly, repaying the IMF early is a political decision between Greece and some of its European lenders who see the IMF as Greece's fiscal "policeman". So, even though it would make very good sense from a narrow financial perspective, it may not happen for political reasons.

Still, the very real possibility that Greece can now repay the IMF early and disengage from its rather harsh oversight means that Greece is firmly standing on its own feet, after a decade of tottering on the edge. This is a powerful message to all investors: Greece is back.

A final note concerning Greek banks: for the last few months Greek banks have been haunted by the IMF's thinly veiled threats that it will demand yet another recapitalization (completely unnecessary, IMHO).  Their shares have suffered on the Athens Stock Exchange, some of them falling as much as 50% from their summer highs. Thus, even the possibility that the IMF can now be completely removed from the Greek program acts as a positive factor.
The current bond rally also creates substantial capital gains for the Greek banks who own several billion GGBs, and who will mark them to market at much higher prices, significantly boosting their annual profits and/or increasing their ability to write off even more non-performing loans.

I will have more to say about GGBs and Greek banks on my next post.

No comments:

Post a Comment