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A significant milestone would be for the European Central Bank (ECB) to include Greek bonds in its massive quantitative easing (QE) stimulus scheme once the bailout ends. As Greece is rated below investment grade, it has only had access to cheap central bank cash because it is part of a bailout program. The ECB has made clear that once Greece leaves the program its waiver will be revoked. To be included in QE, Greece would need to pass an ECB debt sustainability analysis and that is unlikely to happen until the country has implemented reforms agreed in June with Eurogroup creditors to ease its debt profile.
At almost 180 percent, Greece has the highest ratio of debt to gross domestic product in the euro zone, To view a graphic collie cufflinks on Greece's debt-to-GDP ratio, click: reut.rs/2NI1n4m, Analysts at HSBC, however, noted that Greece was considered a special case by euro zone authorities, implying there could be some leniency on the conditions it needs to qualify for QE, If the ECB is satisfied Greece’s debt is sustainable, this would pave the way for Greek bonds to be included in the final months of QE, or at least be included next year in the bank’s program to reinvest proceeds from maturing bonds..
“We believe that the June Eurogroup agreement has materially increased the chances that Greek bonds are included in ECB bond purchases,” said Barclays economist Francois Cabau. He estimates the ECB could buy about 3 billion euros of Greek debt before hitting the limit on how much of the country’s debt it can purchase. Having received 260 billion euros in financial aid since 2010, Greece’s exit from the bailout program will be momentous for the euro zone too. It will be the last European Union member state to come off life support after Ireland in 2013, Spain and Portugal in 2014 and Cyprus in 2016.
Some long-term investors, such as J.P, Morgan’s Gartside say, the positive sentiment means they would “definitely” buy a new Greek bond, a departure from the situation now where most private sector bondholders are hedge funds or domestic banks, The improving picture helped Greek bonds return more than 40 collie cufflinks percent last year in dollar terms and they have performed strongly in 2018 too GR10YT=RR, Two-year yields have fallen 60 bps so far this year to 1.05 percent GR2YT=TWEB, well below 2-year U.S, Treasury yields US2YT=RR..
To view a graphic on Greece's 10-year bond yield, click: reut.rs/2NLfwhb. Besides its junk credit rating, the market’s small size and low traded volumes mean Greek bonds have been shunned by many big investors who prefer more liquid and accessible markets. About 83 percent of Greece’s outstanding 332 billion euros of debt is held by official lenders, while the rest is with hedge funds, banks and domestic pension funds. With only about 40 billion euros worth of bonds actually trading, the market is a fraction of the 2 trillion euros or so that trade in German, French and Italian markets.
Athens is under no immediate pressure to tap the bond markets, It is still due a final 15 billion euro installment under the bailout package and will therefore have a cash buffer in excess of 24 billion euros, according to Swiss bank UBS, That suggests Greece has enough funding to last through 2020 but a new bond would collie cufflinks add liquidity to the Greek market, “If you think that lots of corporates price off the government bond yield curve, building a benchmark makes a lot of sense,” said Gartside at J.P, Morgan Asset Management..
Bond strategists reckon a new 10-year Greek issue could yield about 4 percent. That could prove attractive, given it would be 10 times what euro safe haven, Germany, pays for 10-year cash and well above the 2.5 percent paid by Italy. There was strong demand for a sale of seven-year Greek bonds in February that was seen as a litmus test of private sector interest. But investors have tended to be those with a strong stomach for risk - notably hedge funds - who have been buying Greek bonds throughout the crisis.
U.S.-based Japonica Partners, for example, bought Greek debt at the height of the 2012 crisis and continued to buy in subsequent years, “Our research team had discovered systemic misconceptions with a related massive under-valuation - at the core was a miscalculated and overstated collie cufflinks debt number,” said Japonica’s finance director Christopher Magarian, (For an interactive graphic on Greek government debt: tmsnrt.rs/2JYhBYShttps://tmsnrt.rs/2JYhBYS), Another significant boost for Greek bonds would come from better credit ratings..