Picture: 123RF/LUKAS GOJDA
Picture: 123RF/LUKAS GOJDA

Athens — Greek bonds have breached a threshold that would once have been scoffed at during the financial crisis: benchmark yields below 1%.

It marks a rapid turnaround from less than a decade ago, when yields soared to nearly 45% amid fears the country would crash out of the eurozone. The fact that the debt is still deemed junk seems not to have put off investors scrambling to find the last remaining pockets of yield in the government bond market.

Investors holding the nation’s debt saw returns of more than 30% in the last year, according to Bloomberg Barclays indexes. The latest rally comes on a day when most other European bonds are falling and stocks are rising, highlighting how Greek assets have turned from looking risky to act more as a bet on growth.

“It’s the hunt for yield, it’s the fear of missing out,” said Jens Peter Sorensen, chief analyst at Danske Bank in Copenhagen, Denmark. “The EU has more or less bailed them out for the next eight to nine years and now they actually have a well-functioning government.”

Shrinking debts

The economy is showing signs of getting back to normality, with growth expected to be around 2% last year, helping to shrink Greece’s debt load to about 185% of GDP in 2019. ECB president Christine Lagarde said last week that she was confident the country’s debt would be eligible for its bond-buying programme at some point. It needs an investment-grade rating from one of the four main agencies to be accepted.

Greek 10-year yields fell five basis points to 0.98% in London on Wednesday. By comparison, those on similar-dated Italian bonds were at 0.93%, while much of the eurozone’s debt has negative yields. During the height of the financial crisis Greek 10-year yields topped out at nearly 45% before the country embarked on the biggest debt restructuring ever seen.

The Mediterranean nation’s comeback was given extra momentum in 2019  following the election of the centre-right Kyriakos Mitsotakis and his New Democracy party. The country was able to sell 15-year debt for the first time in more than a decade in January.

It has also put in place a plan to help banks address their stockpile of bad loans, which amounts to €71bn. The programme, called Hercules, promises to reduce this by about 40% and Eurobank Ergasias is ready to be the first to make use of it by applying as soon as February.

Banks have also been among the main beneficiaries of a stock rally that made the country’s benchmark index one of the world’s best performers in 2019. It touched a five-year high in January.

Now sellable

The surging demand for Greek debt is helping local lenders cut pricing on bonds that would have been unsellable a year or two ago. Piraeus Bank drew more than €4bn of bids for a syndicated €500m Tier 2 note on Wednesday, letting it slash the yield to 5.5% at final terms. The group paid 9.75% on a similar deal in June.

“Greece is in a position to benefit from the increased demand for higher yielding euro bonds if the business climate and economic conditions continue to improve,” said Dimitris Dalipis, head of fixed income at Alpha Trust Mutual Fund Management  in Athens, Greece. He said that yields could go even lower should the country benefit from rating upgrades, especially the “wild card” of inclusion into the ECB’s bond-buying stimulus programme.

In January Fitch Ratings lifted Greece to BB with a positive outlook, or just two levels below investment grade, while S&P Global Ratings will review the country on April 24. It has Greece at BB-, or three steps into junk territory, but also with a positive outlook. Moody’s Investors Service has a one-step lower rating.

While Greek yields were already at record lows before hitting 1%, the latest milestone keeps them vying with the borrowing costs of Italy, which is rated at investment grade.

“This seemed to be only a matter of time, but it’s still amazing,” said Christoph Rieger, head of fixed-rated strategy at Commerzbank in Frankfurt. “What clearly helps besides the general risk-on and hunt for yield is lack of supply pressure and hopes about an investment grade-rating that could trigger ECB buying.”