Greece Leads Former Outcasts Back To Bonds

Greece's economy has improved markedly from the dark days of 2009.

Global tensions are rising and the world economy is slowing, but debt markets have turned increasingly lively as yield-hungry investors look for new opportunities—and some battle-scarred sovereigns take advantage of lower borrowing costs.

“We’ve seen a big rally in bond markets globally because of the shift in monetary policy. The market is now pricing in potential Federal Reserve interest-rate cuts whilst the European Central Bank has to respond to weaker economic data, making eurozone tightening less likely,” says Andrew Kenningham, chief Europe economist at Capital Economics. “With bond yields down across the board, some of the less-creditworthy economies have been taking advantage.”

Perhaps the most dramatic case is Greece, issuing a $2.5 billion, five-year bond with an initial 3.6% yield in January. In early March, it announced plans for a $2 billion, 10-year issue, its first since the economic crisis.

Athens’ borrowing costs have fallen to around 3.6%, compared with 4.36% at the end of 2018, and Moody’s upgraded Greece by two notches, to B1. The International Monetary Fund says Greece will join the eurozone’s best performing economies this year, after growing 2% in 2018 and attracting over $10 billion in bids.

Greece isn’t the only black sheep gaining new respectability. This year, Portugal, Spain and Ireland issued new 10-year debt, while Italy sold $8 billion of 30-year bonds. All four offerings were oversubscribed. In January, Turkey—which is facing an economic crisis—raised $2 billion from a 10-year dollar-denominated bond with an investor yield of 7.68%.

Frontier markets are also taking part in the action, with Uzbekistan, Sri Lanka, Egypt, Ghana and even Benin issuing bonds. The latter, with one of Africa’s least developed economies, is issuing an eight-year, floating-rate euro-denominated bond. Benin is rated B2 by Moody’s, while Fitch Ratings has given the fast-growing but still mainly agricultural country a B rating, well below investment grade.

In this context, Greece’s new borrowing looks all the more attractive. Kenningham says that Athens doesn’t actually need the money. With parliamentary elections coming later this year, the government needs to show voters that economic policy is getting back to normal after years turmoil. “Strong demand for the bond will allow Greece to say that it is creditworthy, and also position it for future long-term bond issues,” says Kenningham.