Any one expecting euphoria or damnation would have been disappointed.
Despite the overwhelming take-up in Greece’s mammoth €206bn bond exchange, the first time a developed country has defaulted in six decades, markets greeted the news with a shrug of the shoulders. Equities rose modestly, bond yields fell, while only the euro seemed to sense the drama, dropping heavily.
The outcome was priced in. Indeed, as far as the eurozone debt crisis is concerned, financial markets have already moved on.
“What we are seeing now is that investors are shifting their focus to the next stage,” says Valentijn van Nieuwenhuijzen, head of fixed income strategy at ING Investment Management.
That next stage involves two big considerations for investors. The first does concern Greece. For all the effort in the seven-month process to persuade and cajole investors tinto to taking a 75 per cent loss in net present value terms, almost nobody in the markets thinks it will be enough to spare Greece from further restructurings. Its debt looks far from sustainable.
“My fear is that Greece will likely need more aid this year, and next year, and the year after, and it will likely also need further debt restructuring … This is a story we’ll be talking about for years,” says Rebecca Patterson, chief market strategist at JPMorgan Asset Management.
One way of gauging that risk is through the yields for the 20 new Greek bonds that each investor will receive as part of the exchange and which are due to start trading on Monday.
The shortest maturity is 11 years and, in provisional “grey market” data, the yield on that bond, which moves inversely to prices, is 18 to 21 per cent. That compares with a Reuters quote on Friday of 39 per cent for the existing 10-year bond. But it is far higher than the 14 per cent 10-year yield of Portugal, the next most troubled eurozone country after Greece.
Mr van Nieuwenhuijzen is unlikely to touch the new bonds: “As long as you haven’t had [a] second restructuring, I would see that paper as a distressed play.”
Others take a more nuanced approach. Mark Schofield, global head of interest rate strategy at Citi, says there is likely to be downward pressure on yields in the coming weeks. He thinks they could prove an attractive investment for some, particular Greek pension funds hoping they will get paid out at par.
He adds: “There will also be people who hold them for accounting purposes. There will be a lot of people that won’t want to take the losses. So it’s not all one way.”
Andrew Montgomery, who worked on the so-called private sector involvement or “PSI” deal with Greece for HSBC, one of the closing agents, argues that it will take time for investors to become used to the new bonds, which will be issued under English law and thus will be more secure than many of the bonds swapped in the exchange. He says: “It is very early days. I’m sure it will take time for the markets to absorb the implications of all this. I would not necessarily read too much into the yields right now.”
The second consideration for investors is Portugal. Lisbon has long been seen as the next potential candidate for a second international bailout after Greece. Portuguese bond yields are elevated along the maturity curve. The country’s 3-year bond yields 16 per cent, for instance, while the price on its 10-year bond is just 49 cents in the euro.
Mr Schofield thinks that the good job Athens has made of managing its PSI process could prove enticing to Lisbon, especially as it would need a smaller writedown than Greece. “It is probably quite appealing. I would think Portugal would take a long, hard look at this,” he says.
Few in the markets believe the policymakers’ insistence that Greece is a one-off and that Portugal does not need further help, a position set out on Thursday by the European Central Bank.
Mr van Nieuwenhuijzen, like others, worries that Portugal and other peripheral eurozone countries could find themselves back in the spotlight, especially if under the weight of austerity their economies tumble into recession, making it harder to generate tax revenues needed to reduce their public debt. Even so, he says: “The likelihood is higher that Portugal will not get a PSI this year than that it will.”
People involved in the Greek PSI deal note that the strain of pulling off the agreement means it is unlikely to look too appealing to other countries. “I would not characterise it as an easy process for Greece to go through. I don’t think it would be anything that sovereign issuers would go into lightly. But there will be lessons learned from Greece,” says Mr Montgomery.
Another person close to the deal believes that talk of Greece acting as a template for Portugal is way off the mark: “It is completely overdone. Greece was a very contrived process.”
By contrast, any restructuring of Portugal would be done under the European Stability Mechanism, the permanent bailout facility due to come into force later this year, he says. “The ESM will be much more flexible and far less constrained in what it can do.”
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