Explaining Greece's Bond Sale
A few quick thoughts on Greece’s first bond sale since the Euro crisis:
In case you’re not following every step of the ongoing soap opera that is continental European economic governance, here’s the quick-and-dirty that got us to this notable bond sale. Greece started using the Euro in 2001, just 3 years before it hosted the Summer Olympics. As soon as that happened borrowing costs plummeted for the Greek government – just like they did for other southern European countries that joined the Eurozone but had less-than-stellar fiscal reputations. Investment flowed in from the world, implicitly thinking that Greece was now as trustworthy as Germany. For the next several years, they built up a pretty massive pile of public debt.
After the financial crisis hit, the Greek government couldn’t repay the debts it had. Not that any government could ever pay off all its debts at once, but Greece didn’t have enough money in the bank to pay the small fraction of bonds that came to maturity in April 2010. Their credit rating was slashed to junk status – meaning they’d have to pay an astronomical interest rate for anyone to purchase any of their debt – and Greece asked for help from the IMF and EU.
The IMF came through with €45 billion in loans. In exchange, the IMF and EU basically forced the Greek government to sell anything that wasn’t strapped to the ground of government buildings, and fire everybody who equally wasn’t strapped down. They’ve since received another €110 billion in loans.
There were massive protests over the austerity, failed elections, and a whole lot of uncertainty over Greece’s future in the Eurozone. What’s more important for this latest bond sale is this: Interest rates on a 2-year Greek bond hit 177% in 2012. US 2-year bonds, for reference, are trading at 0.37% - about 540x lower. On top of that, private bond holders lost over 50% of their value when the EU and Greece came to an agreement over Greek debt restructuring.
Okay, background out of the way. Greece just sold €3 billion of 5-year bonds at just 4.95%, which seems pretty low considering the country is still a wreck in just about every way imaginable. Why so low? Felix Salmon has a few ideas. I have a few other ones, too:
Mario Draghi, ECB President, has succeeded.
During financial crises, central bankers are shaman trying to soothe investors’ animal spirits. Bernanke and Greenspan did a great job of getting markets to listen, but there was some doubt that Draghi could. He has a much worse situation, with 5 countries teetering on the edge of becoming the setting for NBC’s terrible post-apocalyptic series Revolution. But instead, Draghi told the world that he’d do “WHATEVER IT TAKES” to keep the Euro together (subtext: Greece won’t go fully bankrupt and won’t leave the Euro. Same with all the other southern European zombies). Eventually, they believed him. Even though the ECB doesn’t always live up to expectations, they got this part right. It’s hard to think that if Draghi didn’t say that, Greece would have been able to do what they did last week.
Investors are Leaving No Rock Unturned Looking for Returns
Interest rates for any major economy have basically been 0% since 2008. They’re not moving from there for at least another year. Now that US markets are a little softer than they were for the last year, investors need to look somewhere else to get returns. This is actually related to my master’s thesis at the LSE, which looks at how stock prices have been affected by the Fed’s focus on lowering long-term bond rates. Investors can’t make money there anymore, so they’ve got to move it elsewhere to meet their forecasts. A big portion of that money went to riskier countries. Greece is now on that list
“The Market” Worked
Both the Greek government and investors have to be pretty happy with the 4.95% rate. The Greek government is paying less than 5% on the bonds, which is pretty low considering their junk credit rating, massive unemployment, deflation, and another debt restructuring likely in the future.
Investors are getting 5%. That’s pretty high, considering that nowhere else in Europe or North America is paying more than about 3%. Even Portugal, which hasn’t gone through any restructuring yet, is only paying 2.6%. On top of that, the backing of the ECB and relatively recent debt restructuring means that it really unlikely (or at least less likely than you think) that Greece defaults in the 5 years until these bonds hit maturity.
So “the market” actually worked, which is pretty stunning in itself. Buyers and sellers entered a marketplace and the price of a good was acceptable to both. That’s how it’s supposed to work, but almost never does in the real world. But that gives a false sense of security – Greece is still totally screwed up economically and they’re going to be paying for the crisis for a generation even though their bond sale went okay.