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Greece on Monday "successfully" returned to the international financial markets for the first time after the announcement of the joint eurozone-International Monetary Fund (IMF) assistance pact last week. This provides the first indication of the real world impact of last week's discussions at the European Union (EU) summit. For Greeks, the outcome seems ominous.
The bonds issued by Greece were of longer maturity than those issued previously: €5 billion at 7-year maturity, which came in at 310 basis points more than the benchmark mid-swap rate, and 334 basis points more than seven-year German bonds. Based on Bloomberg data, this compares to spreads versus similar German maturity bonds due in 2017 of 45 basis points for Italy, 61 basis points for Spain, and 114 basis points for Portugal. In other words, Greece continued to have to pay a very high price in order to gain access to the financial markets relative to its fellow Mediterranean countries. This price signal has several implications.
First, it suggests that the risk of immediate contagion from Greece to other euro members, those in Club Med, is contained as these countries continue to enjoy access to international markets at much cheaper rates than Greece. Greece remains a risk outlier in Europe.
Second, it shows just how steep a price Greece still has to pay to get access to private financing even after following the EU-IMF assistance pledge. While the different maturities make direct comparisons between this week's issuance and the previous Greek bond offer problematic, the latest price point indicates that the EU summit decision, while seemingly helpful in securing to private financing, accomplished next to nothing in terms of bringing down Greece's cost of capital.
In some respects, this is not surprising considering how the EU summit declaration went to great lengths to make explicit that any eurozone assistance to Greece would be "non-concessional, i.e., [that it] not contain any subsidy element." It is impossible to speculate what yield a Greek bond could have been without the promise of ultima ratio eurozone-IMF assistance, as the Greek government in that case would not have launched its bond issue for fear of the cost. So the EU summit has probably had some effect in lowering Greece's cost of capital from a hypothetical "no EU-IMF pledge level." The impossibility of measuring what might have happened without the summit makes it easier for EU leaders to declare the summit a huge success.
It is evident, however, that the possibility of any direct official sector assistance to Greece lowering its costs below the ~300+ basis point spreads with the benchmark German level can only come from IMF participation. The EU summit's proclamation of eurozone aid and "European solidarity" has proven to be a damp squib in this crisis.
Fortunately for Greece, the less costly IMF piece of any joint eurozone-IMF financial assistance will proceed first, with eurozone assistance arriving later—after what could be a potentially acrimonious round of national parliamentary approvals. In fact, considering the popular opposition to any assistance to Greece throughout Europe, one should not underestimate the difficulties of getting transparent bilateral loans from ALL eurozone members.
What would happen if one eurozone parliament—for example, the Netherlands—refuses to authorize its contribution to eurozone assistance ahead of its elections in June, as the US Congress balked over bank bailouts last year? This subject is not discussed in the EU summit's conclusions. Bilateral loans accompanied by a requirement for national parliamentary approval requirement for all eurozone members are hardly something that Greece can count on. Financial markets clearly understand the situation, which is why they are demanding a high cost for Greek loans.
The high yield differentials between Greece and other Mediterranean countries, apart from reflecting the country's worse economic fundamentals (Greece's situation is bad, but hardly five times as bad as Spain!), also illustrate the cost of its battered credibility as a country. Surely, any short-term financial benefit1 the Greek government reaped by hiring expensive investment bankers to devise its off–balance sheet currency swaps and cook its books for years will be dwarfed by the costs of the additional yields now demanded by the markets.
Now that the Lisbon Treaty's "no bailout clause" seems certain to be enforced by Greece's European partners, there's only the hard way left for the Greek government to earn its financial market credibility back—through a long, hard slog of austerity and reneging on spending promises by earlier governments.
This is probably not what Goldman Sachs pitched in 2001 or what past Greek politicians had in mind when they covered up their problems for so long.
Note
1. The fact that Greek statistical fraud almost certainly allowed it to sneak into the eurozone in the first place—compare "Greece's application" in 1999–2000 with the borderline rejection of Lithuania in 2006—and hence reap years of artificially low interest rates is an exception.
