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Friday, 15 December 2017

Looming maturities threaten Greece's bailout exit

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Athens will struggle to pay €36bn due in first three years solo

Greece and its creditors were quick to hail the country’s triumphant return to the sovereign bond market as an important milestone as it prepares for financial independence once its current bailout ends just over a year from now.

“Let’s prepare the full return to markets in summer 2018!” tweeted Pierre Moscovici, economic chief of the European Commission, which – together with the International Monetary Fund – has lent €250bn to the country in three bailouts since 2010.

But a “full return” to markets might be optimistic. Athens faces crippling repayments almost as soon as its bailout money runs out next August: €10bn of outstanding debts and €6bn of interest come due in the first year, with another €20bn due by the end of 2021.

With the country only expected to run a primary surplus of €6bn a year, Greece will need to raise extra funds to pay those bills. Many are sceptical that the country can raise enough on the market, putting a full exit from its third bailout in jeopardy.

“It is critical that there is no important bunching of maturities over the next few years to avoid any possible liquidity problems,” Antonio Garcia Pascual, chief European economist at Barclays, told IFR. “Unfortunately, there is such a bunching in 2019, and it is critically important that this is addressed soon.”

Garcia Pascual believes that the looming maturities could be pushed out into the future as part of a debt relief deal for Greece, which restructured €206bn of debt in 2012. Since then, its outstanding debt pile has grown to €320bn, or 176% of GDP.

ELUSIVE DEAL

But a deal on debt relief has so far proven elusive. The looming maturity payments, which could derail Greece’s bailout exit, might focus minds and push richer European countries, which have so far pushed back on relief, into finally doing a deal.

Athens clearly already has the maturity hump in its sights. Part of its recent foray into markets included a debt swap for holders of a €4bn bond issue maturing in 2019. Investors holding €1.5bn of that issue agreed to swap into the new 2021 bonds.

Some investors believe the swap helped swell what otherwise would have been a disappointing level of demand – €6.5bn compared with €20bn in a deal three years ago – offering proof that Greece would struggle to finance the looming maturities in markets.

“The only reason this latest bond was a success was because of the tender offer, which amounted to half the total demand,” said Louis Gargour, chief investment officer at hedge fund LNG Capital. “Without it, the deal at €3bn would have struggled.”

“Doing the swap reduces the 2019 hurdle significantly, but clearly they have some huge liabilities coming up. Those are going to have to be addressed in other ways – debt issuance won’t be enough to fill that gap. Debt relief is an absolute necessity.”

ROAD BLOCK

Complicating matters, a large chunk of the maturities facing Greece in its first three years of financial independence are to the European Central Bank and IMF, both of which would struggle politically to offer debt relief.

In 2019, Greece is due to pay off €5.7bn of bonds held by the ECB that were exempted from the 2012 restructuring. That same year, it is due to pay off about €2bn in IMF loans – and €2.5bn to investors holding its 2019 bonds that didn’t do the recent swap.

With the ECB and IMF unwilling to restructure, European countries may have to shoulder the full cost of debt relief – and that might involve releasing more funds to pay off the other creditors in the so-called troika.

“The ECB will insist on being made whole. For them it is a red line because [not doing so] would amount to a fiscal transfer,” said Garcia Pascual. “The politicians need to find a way around, which unfortunately for them means they may need to shoulder even more of the debt relief.”

What might be seen as a fourth bailout could prove difficult to stomach for some. Garcia Pascual said there is a risk that the recent success in bond markets might even be used as an argument for not helping, which could lead to a stand-off come 2019.

“Politically, by going now, by demonstrating you are back and the market is rubber-stamping your policies, this government can say it has made it against all the predictions,” he said. “It also gives them more policy space to do what they need to do.”

“But there are potential costs to that strategy that could come back to haunt Greece. Some countries could turn round and say they are adding debt at high coupons, the market is willing to finance them – let them go with the market, they don’t need relief.”

 

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