Investors Support New Greek Bond Issue

By: Mike Campbell

The purpose of the Greek austerity plan is to reduce the debt burden through fiscal restraint and a reduction in public spending. However, the austerity plan does nothing (in the short-term at least) to reduce the cost to Greece of servicing its €300 billion existing debt. To make the repayments falling due on these loans, Greece needs to issue bonds with an adequate return on investment to attract investors to overcome any fears they may have of a Greek debt default and buy the new issue. The latest issue of these bonds (yesterday) was oversubscribed and brought the Greeks €1.56 billion in new funding (the target was €1.2 billion). The bonds were short-term investments with maturity dates of six and twelve months. The rates that the Greeks had to offer (4.55 and 4.85%) were significantly higher (1.38 and 2.2% respectively) than they had had to offer in January, before the extent of the Greek financial crisis had emerged. Greece needs to fund repayments on €53 billion of debt and interest this year and needs to find €11 billion in May.

The Greek finance minister, George Papaconstantinou, has stressed that the government intend to handle their debt problems through the markets and do not intend to call on the Eurozone safety net of €30 billion that Eurozone nations and the IMF have put in place. Some analysts remain sceptical about Greece’s ability to fund its debt through the market and think it is only a matter of time until Greece has to turn to the Eurozone fund. That source of money is in place and can be called on immediately, should it be needed, but the consequences of a Eurozone member being unable to fund their debt through normal channels could be serious on international confidence in the Euro.