Greece looked set to secure a second bailout package worth EUR130 billion Monday after pushing through a crucial debt exchange deal, but the distressed levels at which its new government bonds began trading Monday highlighted the enormity of the challenge the country faces to gets its debts on a more sustainable footing.
Greece received strong participation at a debt restructuring deal last week which was seen as crucial to receiving the second bailout package. The country had to tie up external assistance as it faced a EUR14.4 billion bond redemption that it could not afford to meet.
Although Greece was expected to tie-up the funds, the new series of Greek government bonds were being quoted at around 22-26 cents U.S. to a euro, price levels that are normally associated with heavily distressed debt.
Under the debt exchange, private-sector investors will swap their old bonds for new ones with less than half the face value, lower coupons, and longer maturities, effectively writing off EUR105 billion in Greek debt holdings
The new Greek government bonds have a range of maturities between 11 and 30 years, with step-up coupons. These coupons range from 2% up to 2015, 3% from 2016 to 2020, 3.65% in 2021 and 4.3% between 2022 and 2042.
"Looking ahead, we would expect concerns over Greek sustainability to mount, and possibly rapidly so, even in the wake of the debt deal. Implementation risk remains high while, even were the next government to remain committed to austerity, the ongoing contraction of the economy threatens to quickly reveal the optimistic nature of the new debt target--120.5% of GDP in 2020," noted analysts at Rabobank.
Concerns over Greece's dire fiscal situation are likely to re-emerge when bailout funds run out in 2014. Data Friday showed Greece's gross domestic product contracted by a revised annual rate of 7.5% in the fourth quarter of 2011, the country's statistics office said. The contraction, which follows a 5% GDP decline in the previous quarter, was deeper than a previous February flash estimate of 7% contraction.
The Greek economy is creaking as severe austerity measures bite. This year will mark the fifth straight year that the economy has been in recession.
Persistent weakness in the economy will severely test Greek efforts to pare the country's formidable debt pile. As it is, the public debt to the gross domestic product is expected to still be at 120.5% in 2020 according to the most optimistic scenario.
Not all market participants are bearish on the new Greek debt with one trader highlighting some early pockets of interest in the sector. The new Greek bonds were also trading higher than levels in the when-issued market on Friday.
"There has been some buying from asset managers who are likely looking at a five- to 10-points increase in prices from these levels," the London-based trader noted, adding "however, retail investors have not got these bonds yet and they may look to sell their bonds once they get possession."
Highlighting the difficulties that lie ahead, the new Greek yield curve is currently inverted--a situation where yields at the short-end of the market are higher than at the longer-end--which points to increased stress in the immediate future.
These yield levels still make Greek bonds comfortably the highest yielding in the euro area, reflecting persistent concerns over possible future chapters in the Greek debt drama. Ten-year Portuguese bonds currently trade with a yield just under 13.38% while their long-dated 2037 issue yields around 10.57%.
Market participants will be keeping a close eye on Portugal particularly to see if the Greek deal serves as a template for a deal there or whether Portugal manages to make progress on dealing with its debt without external assistance. In the past, signs of resolution in the debt crisis have quickly been followed by traders latching onto the next most susceptible country. Portuguese 10-year bonds for example, are currently being offered at 53.4% of face value.
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