As Greece Sells 3 Month Debt At Record 4.1% Yield, CreditSights Explains The Negative Downstream Effects Of A Greek Restructuring

Tyler Durden's picture

Even as Greek debt hits new and improved daily record highs each and every day, with the Bund spread for 10 years hitting a ridiculous 1,140, the country continues to pretend it has capital markets access. Although in theory it still does. Even with a Greek restructuring now virtually assured, although as the CreditSights note below notes this would be a political suicide event, the country still managed to sell €1.625 billion of 3 month Bills at the stunning rate of 4.10. Reuters reports: "Greece sold more than 1.6 billion of three-month debt on Tuesday, raising funds to roll over 800 million euros ($1.14 billion) of maturing government paper later in the month, with yields rising above 4 percent. It was priced to yield 4.10 percent, up 25 basis points from an auction in February and around the rate of about 4.2 percent Greece pays on its EU/IMF bailout loans." Yet even with the "attractive" yield the Bid To Cover plunged from 5.08 to 3.45, as the only bidders were banks themselves propped up by the ECB and China: according to PDMA foreign investors accounted for 36% of the issue.

As for why the ECB was last seen buying peripheral debt, primarily of Spanish and Italian origin, it is due to the now certainty that Greece will default in under 4 months as noted previously. Still this is a decision that will likely have a substantial impact on the political picture in Athens. Credit Sights explains:

The reality from Greece's perspective is that it is unclear why restructuring would be a politically astute option. More than a quarter of Greek debt is held domestically – primarily social security (€28 billion) and banks (€31 billion), but even Greek households are holding €6 billion in short-dated securities. While those are relatively small amounts, we don't believe that asking those sectors to accept losses on their holdings of government securities would be a vote winner. What's more, Greece has the liquidity it needs until some time in 2013 thanks to the EU and IMF loan facility. There is €84 billion within Greece's EU-IMF facility that has not yet been drawn.

As far as German and French leaders are concerned, it isn't clear that pushing for a restructuring will save their taxpayers money either. It is still uncertain what impact a Greek debt restructuring would have on European banks and whether a second round of recapitalizations and rescues would be needed or what that might cost. A restructuring of Greek debt could still close the market to Spain, which would then require nearly a third of a trillion euros to fund its debt maturities and the budget deficit between now and the end of 2012. And finally, Greece's budget deficit may still need to be funded by the EU following a restructuring. Even if Greece hits all of its budgetary targets, there is still forecast to be a budget deficit of €50 billion between now and the end of 2014.

Also in the news, last week the Greek government announced €50 billion worth of state asset sales. If achievable, that could reduce the Greek government's debt from a forecasted 148% of GDP (based on the government's predictions for GDP growth and the budget deficit) to 126%. The reality, in our view, is that a restructuring of Greek debt before 2013 is more likely to be a result of political mistakes than an economic assessment. The success of the anti-euro party True Finns in this weekend's Finnish elections might present such a risk. The True Finns are opposed to any bailout of Portugal and would oppose the extension of further disbursements to Greece under the EU-IMF loan facility.

In other words, if you thought Greek protesters were willing to set cops on fire just because the retirement age was raised by 2 years to the low 60s, wait until you see what happens when Greek retirees realize up to 40% of their pensions have just been "hair cut."