Monday 19 July 2010

Debt at any Cost?

One of my main professional scope of activities has to do with debt issue, whether through the preparation of due diligence or business plans, for both borrowers and lenders. So it’s with a great deal of skepticism that I read in Kathimerini that the government was satisfied with its latest round of debt issue.

Last week, the Public Debt Management Agency raised a 26-week bond for EUR 1.625 bln at a rate of 4.65%. The issue was oversubscribed by 3.64 times. About 80% of the issue was subscribed by banks in Greece. This has been heralded as a success by the PDMA Director, Petros Christodoulou:

We are happy with the composition of the investor base and participation,” …. “Starting from the very short end of the market, this is a thumbs-up for the fiscal policy that has been implemented.'”

Finance Minister George Papaconstantinou told reporters in Brussels:

“We are satisfied” … “The year 2011 will be a good one to come back to the market, assuming conditions continue to normalize.”

Although I can understand the very real need for regaining market confidence, I have several major reservations about this issue:

1.      The 6-month rate of 4.65% is exhorbitant. Assuming this debt is not covered by the EUR 110 bln bail-out package, and assuming it won’t be repaid from the regular state budget 6 months from now, it means that the effective annual rate is 9.3%. This is hardly something to be proud of: it shows more than ever that Greek debt is still toxic on world markets.

2.      The fact that 80% of the issue was raised from Greek banks is hardly surprising. This rate is far better than any other investments they will make in the next 6 months in the domestic household or corporate sector. I wonder, however, to what share of the EUR 10 bln granted to “improve liquidity” in the Greek banking sector from the EUR 110 bln bailout has been used by Greek banks to buy Greek government bonds?

This appears to be very much a simple “recycling” operation: the Greek government borrows money at 5% from the IMF and the ECB/Eurozone. The Government passes $ 10 bln (at 5%) onto Greek banks for recapitalisation. The banks then lend part of this money at a 9.3% effective annual rate to the government, making what everyone hopes will be a quick return to keep the Greek debt circus on the road.

Of course, there are also apparently no other short-term options. The EUR 1.625 bln is not covered by the EUR 110 bln bail-out. The government has no other sources of ready cash to refinance the bond. The government does need to re-establish confidence in Greek debt issues on world markets, even if it has to buy this confidence with absurdly high rates. Yet the public statements appear so far removed from the reality that anyone with a rudimentary knowledge of finance feels increasingly uncertain as to the future. If this level of refinancing continues, it is highly unlikely that Greek will be able to emerge from its debt trap. 

Together with Piraeus Bank’s offer for government shares in Agricultural Bank of Greece and the Hellenic Post Bank at what amounts to fire-sale prices, I wonder what other “sacrifices” or deals will soon be made. 


  1. it is a shame if they get into a trap that they can't get out of - now is the time to really plan carefully, make sacrifices to prepare for the future.

  2. Dave, you are absolutely right. Instead of investing in the future - education, competitiveness, etc. - we will be investing in debt payments for generations to come.

  3. Hi,

    I believe the quoted 4.65% rate is the annualized rate (i.e. don't have to multiply by 2). So, it's close to the 5% the govt pays on the rescue plan funds, but still a lot higher than similar instruments of other EU countries.

  4. According to the press release issued by the PDMA, the rate for the 6-month bond was 4.65%. You can find this here:

    Σήμερα διενεργήθηκε δημοπρασία εντόκων γραμματίων διάρκειας 26 εβδομάδων, ύψους 1.250 εκατομμυρίων Ευρώ. Η απόδοση διαμορφώθηκε στο 4,65%. Υποβλήθηκαν συνολικές προσφορές ύψους 4.546 δισεκατομμυρίων Ευρώ, πού υπερκάλυψαν το ζητούμενο ποσό κατά 3,64 φορές.
    Η δημοπρασία πραγματοποιήθηκε μέσω των Βασικών Διαπραγματευτών Αγοράς (Primary Dealers), και η ημερομηνία διακανονισμού είναι η Παρασκευή 16 Ιουλίου 2010.
    Έγιναν δεκτές προσφορές μέχρι του ύψους του δημοπρατηθέντος ποσού, καθώς και μη ανταγωνιστικές προσφορές ύψους 375 εκατομμυρίων Ευρώ.
    Σύμφωνα με τον Κανονισμό Λειτουργίας των Βασικών Διαπραγματευτών Αγοράς μπορούν να υποβληθούν επιπλέον μη ανταγωνιστικές προσφορές ύψους 30% επί του δημοπρατούμενου ποσού, έως την Πέμπτη 15 Ιουλίου 2010, στις 12μ.μ.
    Σημειώνεται ότι δεν δόθηκε καμία προμήθεια.