Greece Pays Bond Investors 5 Times Spain Yield Spread (Update1)

By Caroline Hyde and Sonja Cheung – Bloomberg
March 29 (Bloomberg) — Greece, the European Union’s most indebted member, offered more than five times the yield premium of comparable Spanish debt to lure investors to its first bond sale since a bailout was agreed to for the nation.
Greece priced the 5 billion euros ($6.7 billion) of seven- year bonds to yield 310 basis points more than the benchmark mid-swap rate, according to a banker involved in the transaction, who declined to be identified before the sale is completed.
The bonds’ 6 percent yield equates to 334 basis points more than seven-year German bunds, Europe’s benchmark government securities. That compares with a yield premium, or spread, of 61 basis points for similar-maturity Spanish debt and 114 basis points on Portugal’s government bonds due 2017, according to composite prices on Bloomberg. Italy’s seven-year bonds yield 45 basis points more than bunds, the prices show.
“Greece’s borrowing costs exceed those of Spain and Portugal as it still needs to convince the market that it can roll over existing debt,” said Michiel De Bruin, who will probably buy the securities for the $28 billion of assets he helps manage as head of euro government bonds at F&C Investments in Amsterdam. “Only then is it likely that borrowing costs will fall.”
Prime Minister George Papandreou’s government must raise about 53 billion euros this year, 15.5 billion euros of it by the end of May. Failure to do so could spark a new round of the fiscal crisis and trigger the use of the aid plan to help Greece finance its budget deficit by standing behind the nation’s debt crafted by EU leaders in Brussels March 25.
Default Swaps
The sale pushed up the cost of default insurance on Greece’s debt. Credit-default swaps on the nation climbed 15.5 basis points to 310.5 basis points, according to CMA DataVision. The price of the swaps soared to as high as 428 basis points on Feb. 4 when it seemed likely Greece’s debt crisis would spread to its southern European neighbours.
“This deal is likely to be first of many to get Greece through its April and May funding needs,” said Peter Chatwell, a fixed-income strategist at Credit Agricole CIB in London.
The 6 percent yield on Greece’s new notes compares with 6.30 percent on the nation’s 5 billion euros of 10-year benchmark bonds issued March 4. The country’s five-year notes sold on Jan. 26 now yield 5.76 percent, Bloomberg data show.
“This looks a lot more confident than their other recent issues, which came with a decent discount,” said Toby Nangle, director of asset allocation at Barings Investment Services Ltd. in London.
Worst Performers
Greek government bonds are the worst performers in the 16- nation euro region this year, handing investors a loss of 0.11 percent, compared with gains of 0.58 percent and 1.97 percent from Portuguese and Spanish debt, according to Bloomberg/EFFAAS indexes.
Petros Christodoulou, head of the debt management agency in Athens declined to comment on the bond sale in an interview today, other than to say it would be of “benchmark size.” The aid mechanism removes the risk of Greece failing to repay bond investors and “should tighten the spreads materially,” he said in an e-mailed response to questions on March 26.
Papandreou demanded financial aid from the EU to help Greece reduce its borrowing costs, which he says were unsustainably high. Today’s bond sale pushed the extra yield investor require to hold 10-year Greek notes rather than benchmark German bunds 13 basis points wider to 318 basis points. The gap was 239 at the start of this year and as high as 396 in January. A basis point is 0.01 percentage point.
Euro-Area Countries
Euro-area countries would grant more than half the loans and the International Monetary Fund would provide the rest in the deal struck last week to help stabilize the euro, which has weakened 6 percent against the dollar this year. Papandreou says he never expects to seek assistance.
It’s “counterproductive” to speculate about the scenarios, including developments on spreads, that would spur an aid request under the new facility, he said.
Goldman Sachs Group Inc. Chief European Economist Erik Nielsen estimates Greece will ultimately need an 18-month package of as much as 25 billion euros, with the IMF providing about 10 billion euros of that.
French Finance Minister Christine Lagarde said March 27 in Cernobbio, Italy, that the EU’s strategy shows the “determination” of policy makers to “keep the euro stable.” Her German counterpart, Wolfgang Schaeuble, said in a Welt Online interview the same day that EU countries seeking IMF help must remain an exception and in the longer term “Europe must be able to solve” fiscal problems by itself.
Greece faces about 12 billion euros of debt repayments in April, with 8.2 billion euros of five-year bonds and about 3.9 billion euros of bills maturing that month. It must repay 8.5 billion euros of 10-year bonds in May.
Extending Maturity
“The seven-year tenor on Greece’s new bond is the only viable option, as it does need to extend the average maturity of its debt,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “I hope that the country boxes clever, and doesn’t upsize the offering as it did in January. If Greece does ramp up the deal size, a lot of long- term investors could be put off.”
While those are the only bond maturities Greece faces this year, the country needs an average of almost 2 billion euros a month to cover the budget deficit and interest payments on existing debt, its deficit reduction plan shows.
Budget Cuts
Greece aims to cut its shortfall by four percentage points in 2010 from last year’s 12.7 percent of gross domestic product, before satisfying the EU’s 3 percent limit by 2012.
“The announcement of the bailout mechanism for Greece should end the immediate liquidity and therefore default risk for Greece,” Laurence Mutkin, head of European fixed-income strategy in London at Morgan Stanley, wrote in a report to clients. “However, we think that the longer term trajectory for Greece remains uncertain.”
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Greece hired Alpha Bank AE, Bank of America Merrill Lynch, Emporiki Bank SA, ING Groep NV and Societe Generale SA to manage the sale of new bonds, according to two other bankers.