Fitch: Greek Bond Exchange May Support Full Market Return

Greece’s exchange of sovereign bonds held by private sector creditors is another step towards the resumption of regular bond issuance, Fitch Ratings says. Efforts to re-establish full market access would be bolstered by continued compliance with Greece’s bail-out programme and the prospect of official sector debt relief, both of which are assumed in Fitch’s sovereign rating assessment.

Holders of 20 different bonds with an aggregate principal amount of around EUR25 billion, issued as part of Greece’s 2012 debt restructuring, have agreed to swap them for five new benchmark issues. The participation rate of close to 86% suggests the exchange will achieve its aim of improving liquidity in Greek sovereign bonds, supporting future market access. The “Financial Times” reported on Friday that Greece hopes to raise at least EUR6 billion in 1H18 through new bond issues with maturities of between three and ten years.

The Greek sovereign returned to the capital markets in July after an absence of three years, placing a new benchmark EUR3 billion five-year bond with a yield of 4.625%, and smoothing its maturity profile (around half the proceeds were swapped for bonds due in 2019). A sustainable return to market funding would be positive for Greece’s sovereign creditworthiness. We think both Greece and its official sector creditors will aim for a “clean” exit from the EUR86 billion European Stability Mechanism (ESM) programme in August 2018, which we think would not entail a precautionary credit line.

Issuing market debt would enable Greece to further smooth its maturity profile and build a large deposit buffer before the end of the ESM programme. Market access may depend on whether expectations of official sector debt relief appear likely to be met (over two-thirds of the total economy’s external debt is held by official creditors). This depends on the completion of the third programme review.

On Saturday the Greek government reached a staff-level agreement with its official creditors on reforms supporting the review. If approved, the agreement could be ratified early next year. This supports our view (expressed in our August rating review) that the third review will be concluded without the level of political and economic instability generated by some previous ones. Political risks to programme compliance appear to have fallen, after the Greek government legislated for unpopular measures over the last two years (including fiscal measures for 2019-2020) without losing its parliamentary majority.

However, ideological and political resistance to implementation are still evident, and the high stock of public debt and volatile growth mean that complying with post-programme monitoring (which we think will be more intense than in Ireland or Portugal) may be challenging.

The Eurogroup in June confirmed its commitment to debt relief measures aimed at keeping gross financing needs below 15% of GDP in the medium term and 20% thereafter. It has also indicated that the link between debt relief and growth will be flexible and allow for the impact of unexpected economic shocks. This should support market confidence and post-programme market access.

We upgraded Greece’s sovereign rating to ‘B-‘ in August, reflecting our view that general government debt sustainability will steadily improve, underpinned by ESM programme compliance, reduced political risk, sustained GDP growth and additional fiscal measures. The Positive Outlook reflects our expectation that the third programme review will be smooth and the Eurogroup will grant substantial debt relief in 2018.
Source: Fitch Ratings

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