Greek Bonds Outpace Peers as Market Succumbs to ECB Purchases: Euro Credit
The mantra “Don’t Fight the Fed” has saved many Treasury traders. Investors in euro denominated debt are learning to treat the European Central Bank with the same respect.
Greek debt beat its counterparts in January, handing investors a 3.8 percent return, even as most global investors in a Bloomberg poll predict the nation will default. Irish bonds staunched losses to their best performance since December 2009, after shedding 11 percent in November when the government was forced to seek a bailout. In both cases, strategists say, ECB buying inspired the turnaround.
“I don’t go around meeting people who are particularly optimistic on Greece,” said David Owen, chief European economist at Jefferies International Ltd. in London. “The biggest holders of the Greek paper would probably be the ECB and banks within the euro region, which are holding the bonds because they can’t really realize losses by selling them. Sentiment hasn’t improved much.”
The ECB has spent 76.5 billion euros ($105 billion) on bond purchases since May 10 to stabilize markets rocked by the region’s sovereign-debt crisis. It didn’t buy anything last week, the first halt in three months. The program is part of a European Union-led push to defend the euro after Greece’s near- default stoked concern that some nations in the region would struggle to finance their budget deficits.
Selective Buying
The purchases, which traders with the knowledge of transactions have said are focused on Greek, Irish and Portuguese bonds, have helped to reduce the extra yield that investors demand to hold 10-year Greek debt instead of benchmark German bunds to a near three-month low of about 816 basis points, down from a record 978 reached on Jan. 7.
Greek debt recorded its first gain in four months in January, beating AAA rated German debt and French securities, which handed investors losses of 1.40 percent and 1.15 percent respectively, including reinvested interest. Irish debt lost 0.58 percent last month, while Portuguese bonds shed 1.65 percent, their smallest monthly decline since August.
“There’s a certain amount of optimism out there as people in the market feel that policy makers are perhaps getting closer 1to a solution,” said Pavan Wadhwa, head of European interest- rate strategy at JPMorgan Chase & Co. in London.
Greek Prime Minister George Papandreou said last week he has become more confident that Europe’s leaders can work together to solve the region’s debt crisis.
‘Much More Optimistic’
“The fact that questions were raised in the public debate, even about the viability of the euro, was a positive thing,” Papandreou said on Jan. 28 in Davos, Switzerland. “Now, the leadership in Europe is saying the debate is over, we will do whatever is necessary. I’m much more optimistic that there is a will.”
The nation’s debt as a percentage to gross domestic product stood at 127 percent in 2009, the highest in the 27-nation EU. The EU says the measure will rise to 156 percent in 2012 before peaking in 2013.
Greece has cut spending, raised taxes and trimmed wages to tackle the deficit, which swelled to 15.4 percent of GDP last year. To secure the EU-IMF aid, the government pledged to trim the shortfall to meet the EU’s 3 percent limit in 2014.
That didn’t stop Moody’s Investors Service from placing Greece’s Ba1 bond ratings on review for a possible downgrade on Dec. 16, citing heightened concerns about the country’s ability to reduce its debt to “sustainable levels.”
Bloomberg Poll
Greece’s economy, which went into a recession in the fourth quarter of 2008, is forecast to contract by almost 3 percent this year, according to economists surveyed by Bloomberg News, after shrinking an estimated 4.2 percent in 2010. Expansion is hampered by austerity measures linked to the bailout package.
Almost three-quarters of respondents in a Bloomberg Global Poll conducted between Jan. 21 and Jan. 24 said Greece will likely default on its debt, while 53 percent said Ireland would also probably do so.
“The liquidity support via the ECB’s bond purchases, and any future purchases, perhaps by other bailout mechanisms, is provided in the hope that longer-term sovereign issues of countries such as Greece will be addressed,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “But you have to understand that what you are seeing in the market might be false.”
Among measures being discussed by European policy makers ahead of a March summit meeting is how to expand the European Financial Stability Facility’s mandate, after the backstop failed to stop contagion spreading to Ireland.
‘Useful’ Tool
ECB President Jean-Claude Trichet said on Jan. 26 that it may be “useful” for the 440 billion-euro bailout fund to buy government bonds to help ease tensions in financial markets. Deutsche Bank AG Chief Executive Officer Josef Ackermann said that he also supports the idea.
JPMorgan estimates that if the EFSF, created in May to contain the debt crisis, buys all outstanding Greek debt, the country’s debt-to-GDP ratio will fall by 32 percentage points.
“You don’t want to stand in the way of the ECB, or the EFSF, especially if it is given power to start buying bonds,” said Wadhwa at JPMorgan.
Aviva Investors’ deputy chief investment officer Shahid Ikram isn’t about to buy Greek or Irish bonds, saying policy makers are “just kicking the can a bit further down the road.” The London-based firm oversees $370 billion in assets.
The EFSF is “another special-purpose vehicle that takes debt from A and puts it into B,” said Ikram. “There’s still too much debt around and it doesn’t go anywhere. We stay out of Greece and Ireland for now
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