Greece’s Third Bailout Seen in Debt With Junk Grade: Euro Credit

By Paul Dobson
March 20 (Bloomberg) -- Greece’s bonds and credit ratings are factoring in a third bailout for the nation that analysts and investors say will require greater concessions from its international creditors.
Within a week of euro-area member states giving their formal approval to a second bailout package for Greece, the International Monetary Fund said the country may require additional funding or a further debt restructuring. Pacific Investment Management Co., which runs the world’s biggest bond fund, said it remains “cautious” on euro-area government debt even after the largest-ever sovereign refinancing because the risk remains that Greece will leave the single-currency area.
“It’s still a very steep mountain to climb,” said Harvinder Sian, a senior fixed-income strategist at Royal Bank of Scotland Group Plc in London. The restructuring deal “doesn’t do anything to put Greece on a sustainable path,” he said. “A third bailout will become necessary.”
The price of Greek government bonds maturing in February
2042 that were provided as part of its debt exchange was at
21.48 cents on the euro at 8:04 a.m. London time, with yields at
15.02 percent. Standard & Poor’s said on March 15 it rated the securities CCC, its fourth rank above default, citing questionable growth prospects, a weakening political consensus to implement budget cuts, and a “still large” debt burden.

Default Swaps

Sellers of credit-default swaps on Greece will have to pay as much as $2.5 billion to settle contracts triggered by the nation’s debt restructuring, an auction determined yesterday.
Yields on Portuguese bonds due in 2037 were at 11 percent, with the price at 41.835 cents. The securities are rated BB by S&P, six steps above the new Greek securities.
Greece’s ratio of debt to gross domestic product will fall to 116 percent in 2020 from 165 percent in 2011 if the nation’s “ambitious” program to overhaul the economy is implemented, according to a report posted on the website of the European Union’s executive arm last week.
The EU approved the 130 billion-euro ($172 billion) second Greek bailout on March 14 after the country agreed to spending cuts and structural changes. That followed a first rescue package agree on in May 2010.
While private bondholders wrote off more than 100 billion euros on their Greek government investments as part of the deal, the European Central Bank was exempted from taking losses on the debt it had bought under its Securities Market Program.

‘Big Enough’

“There is a saying, if you do a default, make it big enough,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington. “There is a broad expectation in the market that there will be a writedown of the official-sector debt. The very idea that the ECB should not be able to take losses is wrong.”
Efforts should be made to push Greece’s debt level below 90 percent of GDP and to ensure the nation remains a member of the euro area, said Aslund, an adviser to the Russian government in the early 1990s.
Greece remains “accident prone” and may require further debt restructuring or additional financing from euro countries if it struggles to implement measures attached to a new 130 billion-euro bailout, staff at the IMF wrote in a report released on March 16.
Greek Prime Minister Lucas Papademos said the nation may need more external support if it’s unable to return to financial markets by 2015, the Financial Times reported on March 18, citing an interview.

Sovereign Risks

Pimco said it is avoiding the debt of Greece, Ireland and Portugal and sees a “significant risk” the former will leave the 17-nation euro-region. A key risk is that Greece’s “forthcoming elections in early May will usher in a government that is more hostile to the euro zone and the IMF’s demands for fiscal austerity,” Andrew Balls, London-based head of European portfolio management, said in an interview published on the company’s website yesterday.
Greece may need an extra 20 billion euros over the next three years as its growth and austerity measures fall short of targets, according to JPMorgan Chase & Co. Still, some official- sector aid may help contain its debt, according to Kedran Panageas, a fixed-income strategist at the company in London.
“It is highly likely that Greece is going to need to take some form of additional action, like lowering interest rates or extending maturities on official-sector loans,” she said. “The debt is barely sustainable after this, and they will probably need more support.”

Equity Rally

Stock markets have rallied this month, while haven assets including German bunds and U.S. Treasuries slid, aided by the completion of Greece’s second bailout. The Stoxx Europe 600 Index rose 2.9 percent since Feb. 29, while 10-year bund yields climbed 24 basis points to 2.06 percent, and similar-maturity Treasury yields increased 38 basis points to 2.35 percent.
Further “support looks more likely than not” for Greece, said Alex Johnson, co-head of global fixed income at Fischer Francis Trees & Watts in London, which has $54 billion in assets.
“The EU and IMF loans are likely to be restructured at some stage, but Greece and its people seem to want to remain in the euro, and other euro-zone countries seem to want that for I suspect social reasons as well as containment reasons.”