Commentary on Greece's Latest Bond Issue

Yesterday Greece sold 5 billion euros worth of 7-year bonds via syndication.  The deal priced at mid-swaps plus 310 basis points to yield 6%, a level double what Germany would pay to borrow at the same tenure.  The bid-to-cover ratio was only 1.4, compared to more than 3 for Greece's 5-year, 5 billion euro auction held on 4 March.  Foreigners bought 57% of this deal, versus 77% in the aforementioned 5-year offering.

While the jury is out to some extent (see linked story), the perception around my office was that this syndication went quite poorly, especially considering that issue's yield widened 24 basis points in the secondary market today.  Additionally, today there was an unannounced reopening of the Greek 12-year of up to 1 billion euros, which only managed to attract 390 million euros in orders.  Unsurprisingly, Greek CDS spreads were wider on the day.

Many people were looking to the 7-year auction as a gauge of markets' perception of the EU plan for offering financial assistance to Greece. Some of the finer details still need some fleshing out, but broadly, there is to be a pool of 20-22 billion euros available from the EU and the IMF (providing 2/3 and 1/3 respectively) for Greece to tap in the situation that it cannot raise funds via the private market.  While an effective bridge for any short-term financing issues, this does nothing to address the fact that if Greece continues refinancing in the private markets at 6%, they will end up be paying more than 7% of GDP in interest payments alone.  Does anyone else see a dizzying debt spiral?  See my previous post for a longer discussion of what constitutes sustainable a debt burden.  Also, perhaps the ability of any euro zone country (read: Germany) to veto any potential action removes some of this bill's legitimacy?

Regardless of what aspect(s) of the bill the market did not like, this auction shows that investors are still very skeptical of Greece's ability to right the ship - arguably more so than in early March (the time of the preceding, better received syndication).  Greece has a tough slog ahead of them if they are to avoid default.  I am generally an optimist, but the realist in me is saying that Greece doesn't have what it takes.