Although Greece currently has the lowest sovereign rating in the eurozone and the highest budget deficit ratio, its membership was enough to reassure investors that its 15-year issue in November was a safe bet. Writer Edward Russell-Walling

Its economy is in seriously bad shape. Its sovereign credit rating has been downgraded by two agencies this year and placed on negative outlook by the third. And yet the Hellenic Republic - Greece - still managed a sell-out with its 15-year bond issue in November, raising €7bn. Membership of the eurozone, like the American Express card, comes with its privileges.

Greece has long been regarded as one of the weakest economies in the EU, part of the 'slow-lane' eurozone club - Portugal, Ireland, Greece and Spain - known as the PIGS. Greece's change of government in October, when the socialist Pasok party supplanted the right-wing New Democracy party, led to the revelation that things were worse than suspected.

Clearly taken aback by the true state of the public accounts, the new government has adopted a 'kitchen-sink' strategy, confessing all and blaming it on its predecessors. The real shocker was that the budget deficit estimate for 2009 more than doubled to 12.7% of gross domestic product (GDP). The EU restricts deficit ratios for member states to 3% of GDP. While not alone in breaching the limit, Greece has the worst ratio by some margin.

Downward spiral

Standard & Poor's had downgraded Greek sovereign debt from A to A- in January, citing an underlying loss of competitiveness in the Greek economy and calling for public spending reforms. October's deficit confession resulted in an A to A- downgrade from Fitch shortly thereafter.

October also saw Moody's put Greece's A1 foreign and local currency ratings on negative review, as it questioned the sustainability of the nation's public finances. The agency pointed out that investors increasingly discriminate between different eurozone sovereign ratings and anticipated "more lasting upward pressure" on Greek interest rates compared with A1 rating peers such as Slovakia.

Time of need

Everyone agrees that Greece needs to cut spending and raise taxes. Finance minister George Papaconstantinou promised to do as much in his draft 2010 budget, announced in early November. He pledged to reduce the deficit to 9.7% of GDP through a combination of new taxes and modestly reduced spending. He forecast negative economic growth of 0.3% in 2010, compared with projections of -1.5% in 2009.

Whatever the size of next year's shortfall, this year's still has to be funded - and a couple of days before the draft budget announcement, Greece's Public Debt Management Agency (PDMA) swooped on the market with its 15-year deal.

The market in Greek government bonds has become more liquid and efficient in recent years, with improved transparency and predictability in the primary market. According to the PDMA, this has been helped by a more active dialogue with primary dealers and key investors, and the pre-announcement of annual funding programmes and quarterly issuance schedules. An increasing weight in government bond indices has boosted secondary market trading and tightened spreads.

General funding policy is for syndicated bond issues with an initial size of about €5bn, rising to between €7bn and €9bn after taps. Issuance has concentrated on the three, five, 10 and 30-year segments, with allocation skewed to long-term holders. Prior to November, there had been six such issues this year (three, five and 10-year) raising €49.5bn with subsequent taps.

"In the first half of 2009, we couldn't do anything longer than 10 years," says PDMA director-general Spyros Papanicolaou. "This time, we were advised by our banks that there was strong demand for longer-term issues - with a gradual reduction of risk aversion, investors are trying to pick up some yield. That turned out to be right."

While Greece had not issued 15-year paper since 2006, the PDMA took the advice of its bankers - joint bookrunners Credit Suisse, Deutsche Bank, HSBC, National Bank of Greece and Société Générale. The response was extremely positive.

Privilege club

"Greece is a member of the eurozone and, though it has the lowest rating, that gives us a certain benefit," says Mr Papanicolaou. "Despite the recent downgrades and bad publicity, it appears that investors have done their own risk analysis. If you pay something on top, that covers the risk and it got us a very good book."

Investors clearly decided that their money was safe inside the eurozone, with no risk of default, and they went for the added yield - a coupon of 5.3% representing a re-offer spread of 142 basis points over mid-swaps, at the tight end of guidance. With orders of €11bn, the transaction size was increased to €7bn.

What especially pleased the PDMA was the quality of the book. There was an abnormally high non-Greek participation of 61%, compared with a typical 45% to 50%, and real money accounts took 62%.

"Greece has serious economic problems and its economic performance is nothing to be proud about," says Mr Papanicolaou. "But its credit record is spotless, and we have never experienced problems in raising the funds we need."


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