Petros Christodoulou, head of the Greek debt management agency, said June 28 that Athens plans to issue between 4 and 4.5 billion euros ($4.9-$5.5 billion) in short-term Treasury bills in July. This confirms speculation in the Greek media from June 23 — speculation Christodoulou initially denied — that Athens is looking to return to commercial funding despite having immediate access to the 20 billion euro tranche from the 110 billion euro bailout package from the European Union and International Monetary Fund (IMF).
News of Athens’ return to financial markets for funding comes as a surprise. The EU/IMF bailout is sufficient to fund Greece for approximately two to three years without tapping the commercial markets. The whole reason Greece needed to be bailed out in the first place was because its forays into the international markets in April were met with investor skepticism, causing the cost of financing to rise to a point that the Greek government could no longer afford.
That said, proving that it can access the international debt markets is an important goal for Athens. Greece has to return to the debt markets at some point, and testing the waters when the bailout funding does not make it a life-or-death situation makes sense. Furthermore, by financing itself commercially in tandem with the bailout package, Greece can prevent the complete atrophy of its relationship with international markets. It can then claim that it is no longer “on life support” and thus instill confidence in its budget deficit program. Finally, being able to tap international markets allows Athens to stretch the 110 billion euro bailout further, making it last more than two to three years.
There is logic behind the move, but there are three criteria that Athens might consider fulfilling before committing to holding an auction.
First, it might want to have something positive to offer investors. Greece is hoping that it has two things to offer. The EU/IMF four-day evaluation mission confirmed that Greek austerity measures were on track June 17. Athens also hopes that its pension reform — which its parliament is to vote on the first week of July — will further reassure investors that it is on the right path. While neither of these factors offers actual hard data that Greece is convalescing, they are as much reassurance as the Greek government can offer.
Second, Athens might consider issuing short maturities that fall well within the time period of the 110 billion euro bailout — two to three years — and therefore greatly reduce the chance that it would default on the loans. That way, investors would feel far less uncertain about lending Greece money. According to the government statement, Athens’ plan is to sell three-, six- and 12-month T-bills worth approximately 4-4.5 billion euros on July 13 and July 20. Investors will feel far less uncomfortable about giving Greece a three- or six-month loan knowing that it has access to the 110 billion euro bailout for three years.
Third, Greece might consider starting with an amount small enough that it would not precipitate a crisis if the auction fails. This is where Greece definitely decided not to be timid. The plan to auction off 4.5 billion euros — considering that Athens was near a default in April — shows that Greece is either taking a gamble or is privy to information STRATFOR is not.
There is not a great risk in the auction for Greece. A failure — even a disastrous one — in commercial funding will not limit Greece’s access to its 110 billion euro bailout. The risk is far greater for the eurozone. With investor focus and pressure squarely on Spain, the last thing the eurozone needs is a failed Greek bond auction reminding everyone that Greece is still a problem, despite the bailout that should have quieted concerns about Greece. Therefore, it is highly unlikely that the EU and IMF — already speaking to the Greeks on a daily basis as part of the conditions of the bailout — would allow Greece to hold a bond auction that could fail and thus launch a new round of investor panic in the eurozone.
This seems to indicate that there is far more coordination between the EU, the IMF and Greece than Athens has disclosed. A successful Greek auction — one for 4.5 billion euros, for example — would go a long way to reassuring investors psychologically about the situation in the rest of the eurozone — particularly Spain, whose problems are actually nowhere near as severe as Greece’s. In other words, it would generate positive press for the eurozone’s efforts to resolve the crisis. However, there is also danger in this strategy; if it turns out that there was a high level of coordination between the EU, IMF and Greece, or that the auction essentially was staged, it could be more damaging to investor confidence in the eurozone than a failed bond auction.