Friday, 12 July 2013

Greek Bonds. Value or Junk?

Greek Bonds. Value or junk?
The European periphery bond markets have suffered a lot with the adventures of the Portuguese government. Investors tend to dump periphery bonds en masse without examining the finer details. Let me explain what I mean. Greece is in the final stages of its fiscal adjustment. In 2014 it would most probably post a primary surplus. Furthermore Greece has done its PSI. Bonds have been haircut by more than 75% (in NPV terms). By contrast neither Portugal nor any other southern country is anywhere near addressing their debt imbalances. Their PSI’s are ahead, whereas the Greek one is behind. Moreover, Greece would largely complete the recapitalization of its banks in the next few days and although they are far from pinnacles of health they too are in their closing cycles. By contrast, banks in Spain, Portugal or Italy are at the beginning of the process.
Then there are also the technicalities of the Greek bonds.
·         The majority of the Greek debt (except the ECB holdings) is under English law and thus cannot be restructured by simple act of parliament. By contrast, the majority of bonds from other countries is under local law and thus amenable to “voluntarily restructure, roll over or change”.
·         The new Greek bonds have, cross default
·         Pari Passu with EFSF loans
·         Sovereign immunity waiver
·         Negative pledge
·         Tax gross up
In other words, the Greek bonds are much safer than most other periphery bonds. But there are also some trading technicalities that should be noted.
·         After last year’s buyback the available stock of bonds is around 34billion. This represents 10% of the total Greek debt. To impose a moratorium on these and suffer the legal complications would be imprudent.
·         These bonds carry a 2% coupon. Thus servicing them only takes 0.4% of GDP.
·         Greek banks own small amounts of this 34billion since they were arm twisted into giving them to the buy back. Actually this last observation is very important now that the Greek banks complete their recapitalization projects.
If you were a Greek bank, recapitalized and with money to buy assets, where would you invest. In Greek bonds, yielding close to 11-12% for the next 10-20years or to loans. This is no brainer; Greek banks are natural buyers and supporters of the GGB market. Thus they appear to be much safer than other periphery bonds. The Portuguese bonds for example is another story. With 23billion in the vaults of the ECB and under the SMP immunity, any restructuring would be painful.

Hot summer?
If we are to believe the Greek government next week is going to be a monumental one. After 3 year of procrastination and playing the cat and mouse game with the Troika the first public sector job losses would materialize. The law requires few thousands to be “moved” or made redundant. Unfortunately, as it is usually the case in Greece, the job losses would not take into account skills or needs but would be a horizontal cut implemented in the lowest paid jobs.
In any case, this is a precondition for Greece to receive the next installment of the installment. Greece gets the next installment due, in a series of sub-installments. Troika decided that since not much has been done since their last visit (cat and mouse game) they should break the installment.
Firing public sector workers is total anathema in Greece (as I guess is in most EU countries with the exception of France were it is the ultimate sin). All of Greece’s job losses have come from the private sector so far. In theory, this action should command widespread rebellion, but as temperatures hit 30 degrees burning Athens does not bring an advantage. Politicians on both coalition parties know that they have to support the bill otherwise they will lose their parliamentary seats. So far they have lost the respect of the people and cannot afford a quiet lunch out, without being heckled or harassed. But losing their parliamentary privileges is a step too far. So, one should expect the usual big words of defiance followed by submission to personal survival instinct.
In other words, the summer would be hot in Greece as it is always is with little further increase in local entropy.
Funding gaps
Also in the news were reports of funding holes in the Troika program. These reports should be seen more in the light of internal Troika politics rather than a series threat to Greece. It is true that tax receipts are lacking in Greece and the depression is deeper than originally thought but the difference of a couple of billion hardly warrants panic. As the German elections are approaching the interesting parties (ECB, EU, IMF) position themselves to extract political concessions now that the German government is impotent.