Rob Davies: Big problem, wrong solution
Petros Christodoulou, the new head of Greece’s Public Debt Management Agency, has the unenviable job of getting investors to part with €53 billion to purchase all the bonds Greece needs to sell this year.
His task has been made harder by the sour taste the agency’s €8 billion five-year bond in January left in the mouths of many investors. While initially offered at a spread of around 380 basis points over mid-swaps, when that attracted a €25 billion order book, Greece cut the launch spread by 30bp.
Normally, if a borrower can get away with cutting its borrowing costs, all power to it. But these are not normal circumstances, and it might have been more prudent for Greece to keep investors on side considering how much it needs to raise.
According to reports, negative sentiment caused Greece to put back plans to sell a 10-year bond in February until March. When that deal comes to market, investors will want to be properly compensated, meaning the coupon could be closer to 7%. Unless the government is able to drastically slash costs and/or raise its revenues, such a high level of interest could make it increasingly difficult for Greece to service its debt.
However, much has changed since Greece tapped the market in January. A public – albeit vague – declaration of support by the European Union last month suggests stronger Eurozone economies will step in to save Greece from default. If rumours are to be believed, EU support will not come in the form of direct funding but from Europe’s strongest economies, France and Germany, coercing state-owned banks to purchase or guarantee Greek government bonds.
It is easy to see how Greece would benefit: both options would allow it to issue debt at a level of interest well below what investors are willing to pay. And for Eurozone governments, it avoids the politically sensitive issue of having to justify why they are bailing out a weaker EU member when the recovery is still fragile.
Even so, it is staggering anyone thinks it is wise to encourage (or force) state-owned entities to take highly risky assets onto their balance sheets after what happened in the financial crisis. The German Landesbanks, for example, are still coming to terms with the costly mistake – of their own making – of investing in highly rated structured credit assets. Repeating the error, with government backing, would be unforgivable.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Structured products
Podcast: Claudio Albanese on how bad models survive
Darwin’s theory of natural selection could help quants detect flawed models and strategies
Range accruals under spotlight as Taiwan prepares for FRTB
Taiwanese banks review viability of products offering options on long-dated rates
Structured products gain favour among Chinese enterprises
The Chinese government’s flagship national strategy for the advancement of regional connectivity – the Belt and Road Initiative – continues to encourage the outward expansion of Chinese state-owned enterprises (SOEs). Here, Guotai Junan International…
Structured notes – Transforming risk into opportunities
Global markets have experienced a period of extreme volatility in response to acute concerns over the economic impact of the Covid‑19 pandemic. Numerix explores what this means for traders, issuers, risk managers and investors as the structured products…
Structured products – Transforming risk into opportunities
The structured product market is one of the most dynamic and complex of all, offering a multitude of benefits to investors. But increased regulation, intense competition and heightened volatility have become the new normal in financial markets, creating…
Increased adoption and innovation are driving the structured products market
To help better understand the challenges and opportunities a range of firms face when operating in this business, the current trends and future of structured products, and how the digital evolution is impacting the market, Numerix’s Ilja Faerman, senior…
Structured products – The ART of risk transfer
Exploring the risk thrown up by autocallables has created a new family of structured products, offering diversification to investors while allowing their manufacturers room to extend their portfolios, writes Manvir Nijhar, co-head of equities and equity…
Most read
- As FCMs dwindle, regulators fear systemic risk
- Top 10 operational risks for 2024
- Top 10 op risks: AI fears drive cyber risk to record high