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Greece Looks for Options Amid Debt Crisis

Wednesday, 03 March 2010 11:52 AM

The eyes of the world are on debt-ridden Greece as the country struggles to placate the EU and markets with spending cuts and strains to raise money to avoid default. But other countries, like the United States and Britain, have very high debt ratios — so why has the financial balance come so catastrophically undone for the small Balkan country?

And when such things happen, where does a country turn to borrow what it needs?

Greece's latest austerity measures, announced Wednesday and worth 4.8 billion euros ($6.5 billion) in savings, were aimed at convincing the world that it can handle its debt load, making payments and borrowing to roll over debt that's coming due.

The country desperately needs to raise money on the bond markets, the normal way for countries to finance public sector activities like building roads and schools.

But its ability to do so was given an almost fatal blow by revelations the country had for years faked its budget statistics to hide the true level of debt as well as a lack of trust in the government's ability to enforce reforms.

"I very much doubt that over the next two to three months Greece will do any auction," the way most governments raise money, said Marc Ostwald, a fixed-income strategist at Monument Securities in London.

Instead, it will have to arrange sales directly with investors to avoid the destabilizing and publicly humilitating scenario of its bond auction being snubbed.

"Greece simply can't afford an auction failure. That would send yields even higher and would be felt not just in Greece but across financial markets," Ostwald said.

Other countries, even those with big economies like the U.K., have suffered "failed" auctions — a somewhat dramatic name for an offer in which the government doesn't raise all it wants — without plunging into the sort of debt crisis afflicting Greece.

In fact, the U.K. government's budget deficit as a share of gross domestic product remains on track to reach 12 percent this year, about the same as Greece's, while the U.S. deficit hit 9.9 percent of output in 2009.

Why, then, is Greece being singled out by markets? The issue remains a question of trust.

When a U.K. auction of 40-year bonds in March last year failed to receive bids for the full amount offered, markets didn't panic because it was not considered due to a lack of confidence in the government's ability to repay debt, but rather market technicalities. Debt offices in many countries acknowledge that failed auctions can happen occasionally and are part of the process of identifying how much debt investors can buy up at key times of the year.

Holders of U.S. Treasuries might like to see the U.S. government plan some spending cuts — but they are not worried about default because they trust the U.S. economy is strong enough to generate the revenue for the government — which also can always raise taxes in a pinch.

Greece, however, has squandered much of that trust. It faces unappetizing prospect of having to pay higher interest rates on the money it needs to borrow.

It must raise cash from global investors to pay off some 20 billion euros ($27 billion) worth of government bonds maturing by the end of May. It plans to borrow about 54 billion euros for the whole of this year, and has so far raised around 13 billion euros.

To get around the difficulty of an auction, Greece is opting for a safer method of selling bonds: syndication.

At an auction, large banks bid over the space of an hour or so for the amount of bonds they want at the interest rate they would like to get paid. In syndication, the debt office approaches the banks and agrees on sale details before publicly announcing a deal.

Other interested investors are required to go through these banks.

"They open a 'shadow book' and go around quietly evaluating interest, and then when the details are acceptable to both sides, they go ahead with the issuance," said Ostwald.

Greece's last bond sale on Jan. 25 was a syndication — its offer of 3 billion euros to 5 billion euros attracted a total of 25 billion euros in offers and it took bids for a total of 8 billion euros ($11 billion) for five years at a rate of 6.10 percent.

Since then, however, market sentiment has become more fragile and investors have raised their rate demands.

"Greece has been looking for interest in a 10-year bond for some time now and apparently has received bids of around 7 percent, which would be excessive," said Ostwald.

By contrast, Germany borrows on capital markets around 3 percent.

While a 7 percent rate could technically be affordable, it risks getting investors spoiled with unusually high returns, a precedent which could take some time to reverse. Greece is more likely to aim for 5.5 to 6 percent, Ostwald said.

That hope was boosted Wednesday by a mostly positive market reaction to Greece's latest austerity cuts.

"The measures should allow Greece to press ahead with a planned bond issue of around euro5 billion in the next few days — note that bond yields have already fallen to around 6 percent in anticipation of the measures, lower than at the time of the last auction," said Ben May, European economist at Capital Economics.

However, he noted that raising the other 20 billion euros by the end of May would require "firmer pledges of support from other eurozone countries."

Eurozone countries could announce some form of concrete support for Greece. Experts believe French and German state-owned banks may be pushed to buy Greek debt but be guaranteed against losses. That would avoid the sensitive political issue of sending German taxpayer money to pay for Greek pensions and also give markets a stronger degree of confidence in Greek debt.

Papandreou's "meeting with (German Chancellor) Angela Merkel on Friday could be crucial," said May.

Some reports suggest Greece may also look to issue bonds in private placements, in which the bonds are not then typically traded in the secondary market as syndicated bonds can be.

The Greek government already sells 5-20 percent of its bonds in this manner, but they are usually held in order to diversify debt holders — now mostly from the eurozone — and to fine tune the makeup of its debt rather than to avoid exposure to market forces.

Resorting to private placements could also be interpreted by markets as a lack of confidence, the very thing Greece is keen to recover.

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The eyes of the world are on debt-ridden Greece as the country struggles to placate the EU and markets with spending cuts and strains to raise money to avoid default. But other countries, like the United States and Britain, have very high debt ratios so why has the...
Wednesday, 03 March 2010 11:52 AM
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