No tragedy: Greek bonds up 80% since January

Investors bold enough to buy junk- rated Greek bonds in January have earned twenty times more than owners of top-rated German debt this year even after the biggest ever sovereign restructuring.

Greek government bonds returned 80 percent this year, compared with 3.7 percent for German bunds and 6.1 percent for Spanish securities, Bank of America Merrill Lynch indexes show. It’s the first year since 2009 that investors made money on Greek securities, with 2012 providing the biggest advance since Merrill began compiling the data in 1998, according to figures that don’t reflect this month’s debt buyback by the government.

European leaders warned earlier this year that Greece’s future as a euro member was at stake in elections, with parties opposed to the country’s bailout terms gaining support. The resulting coalition government pledged to honor commitments, diminishing the risk of an exit from the 17-nation currency bloc by raising taxes and cutting wages and pensions as the economy shrinks.

“Much of the rally was based on fundamentals, just not economy fundamentals,” said Gabriel Sterne, an economist at Exotix Ltd., a London-based brokerage specializing in illiquid bonds and loans. “The fundamentals were the incentives for Europe to kick Greece out of the euro zone, which people vastly overstated.”
Trading Trends

The country’s 10-year bond yields dropped as low as 11.20 percent from a peak of 44.21 percent on March 9, the eve of Greece’s debt restructuring. Trading of Greek government debt dropped in November with volumes on the HDAT electronic secondary securities market totaling 97 million euros ($128.4 million), down from 105 million euros in October, data from the Bank of Greece show. Trading was 1 million euros in November 2011.

“The total return is only relevant if it is investable — if you could have bought it and if you could sell it,” said Steven Major, global head of fixed-income research at HSBC Holdings Plc (HSBA) in London. “How could I have replicated that return in Greece? Was it possible for me to actually buy those bonds at the price that was on the screen at the time?”

Prime Minister Antonis Samaras’s three-party coalition government won parliamentary approval for a 13.5 billion-euro two-year package of budget cuts demanded by the European Union and International Monetary Fund, prompting the release this month of bailout funds frozen since July.
Rating Upgrade

Standard & Poor’s on June 18 raised Greece’s credit rating to B-, the highest since June 2011, from selective default after a bond buyback helped reduce the country’s debt burden. Finance Minister Yannis Stournaras called the upgrade a “great success” for his country, which has received 240 billion euros of loan pledges from the euro area and IMF in two bailouts since May 2010.

The EU and IMF demanded the buyback, with the country paying an average of about 33.8 percent of face value to retire 31.9 billion euros of bonds and reduce its debt, which the European Commission expects to peak at 174 percent of gross domestic product next year. In March, private investors lost 53.5 percent of the face value of their bond holdings, reducing the country’s debt by about 100 billion euros in the largest sovereign restructuring in history.

Greece’s economy, which has been in recession for five years, probably will contract 6 percent this year and 4.2 percent in 2013, according to the European Commission. About 25 percent of the workforce is unemployed with youth joblessness at 56 percent, the highest in the EU.
Tax Regime

“What’s happening in Greece at the moment is not a recession, it’s a Great Depression,” said Tassos Anastasatos, senior economist at Eurobank Ergasias SA (EUROB) in Athens. The country needs to stimulate exports, while a lack of stability in the country’s tax regime is impeding foreign investment, he said.

The Athens Stock Exchange Index made its first annual gain since 2009, climbing almost 30 percent this year. Coca Cola Hellenic Bottling Co. SA (EEEK), the country’s biggest company by market value, said in October that it would leave the exchange to list its shares in London because of concerns about the unstable tax environment.
— Bloomberg News —