Greek issue fails to mollify sceptics
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The Greek government raised €5 billion (£4.5 billion) through an issue of 10-year bonds last week, sparking renewed optimism for the economy. However, some fixed income managers warn that its troubles are not yet over.
This followed an issuance of five-year bonds in January, which raised €5 billion. Greece has also announced a raft of measures designed to deal with its debt crisis, including tax rises and public spending cuts.
Nick Gartside, the head of global fixed income at Schroders, says he bought into both the five-year and 10-year bond issues because they looked to be good value. (article continues below)
“What Greece has is a fiscal deficit of 12% so for every dollar coming in it has 88 cents of revenue. Initially the Greeks came up with a plan, but it wasn’t tough enough.
“What they released [last week] in conjunction with the European Union [EU] and the IMF [International Monetary Fund] was [a plan for] more stringent and severe tax rises and spending cuts, which was well received. On the back of that, they have issued a bond which has been well subscribed.”
The Greek 10-year bonds look attractive on a yield slightly above 6%, Gartside (pictured) says. Meanwhile, the safety net provided by the EU has encouraged investors to buy Greece’s bonds, he adds.
However, John McNeil, the head of international rates at Aegon, warns that Greece has not yet solved its problems. He says a total of €16 billion of Greek bonds will be redeemed in the next two months, presenting a further obstacle. “Greece needs to raise €8 billion in April and €8 billion in May,” he says. “This is going to be the big test.”
Greece hopes to save almost €5 billion, or 2% of GDP, and begin tackling its €300 billion of debt through a new programme of austerity, which will see public sector pay cut, sales tax increased from 19% to 21%, and higher taxes on alcohol, fuel, luxury items, and tobacco.
In a statement issued last week, José Manuel Durão Barroso, the president of the European Commission, supported Greece’s plan and said its target to reduce its debt by 4% of GDP this year was realistic.
The euro rose 0.55% against the dollar soon after the Ministry of Finance unveiled the new budget.
