The Mitsotakis Effect: Greek Bonds Sell Below 0% Interest

Athens Stock Market. (Photo by Eurokinissi/Eleni Kouri)

ATHENS – In what was seen as investor faith returning with the election of the pro-business Prime Minister and New Democracy leader Kyriakos Mitsotakis, Greece sold 487.5 million euros ($537.35 million) of three-month debt for an interest rate of minus 0.02 percent.

Ironically, that meant a slow recovery from a 9 1/2-year-long economic crisis – with Mitsotakis lowering the corporate tax rate and hunting for investors – meant they were actually willing to pay Greece to borrow money, putting the country in the exclusive negative-yield debt club.

In a report, the Wall Street Journal said it was a sign of how far investors will go in a hunt for returns amid a global slump in yields.

A previous Greek auction for three-month bills sold for a rate of 0.095 percent as the country is seeking a full return to markets after the Aug. 20, 2018 end of three international bailouts of 326 billion euros ($359.33 billion) needed to prop up a plunging economy battered by years of wild government overspending and runaway patronage.

But with investors paying governments from Germany and Switzerland to Italy to hold their money as the European Central Bank cuts borrowing costs to bolster economic growth in the region, they are making riskier moves to get returns, including turning the once-pariah Greece.

“The general monetary-policy environment, not only in Europe but globally, helps issuers that have more debt on their balance sheet,” Andrey Kuznetsov, Senior Portfolio Manager at Hermes Investment Management told the Journal.

The yield on the government debt has tracked improvements in the Greek economy, suggesting that debt holders are “not as worried they’re going to lose money as they were in the past,” according to Lefteris Farmakis, a strategist at UBS.

Greece’s economy, which shrank some 25 percent during the crisis, is coming back with growth at about 2 percent but it will still need monitoring for years by envoys from its creditors, the Troika of the European Union-European Central Bank-European Stability Mechanism (EU-ECB-ESM.)

Greece must meet fiscal targets, including a 3.5 percent primary surplus until 2022, which doesn’t include interest on the debt, the cost of running cities and towns, state enterprises, social security and some military expenditures and to avoid triggering automatic spending cuts.

It’s not over for Greece yet though despite the achievement because the low-interest bailouts are going to be replaced with higher interest long-term borrowing costs but the paper said investors are confident Germany – the biggest contributor to the bailouts – and the European Union won’t let Greece fall back into crisis, especially with Mitsotakis making a big push to restart major projects stymied for 4 ½ years by the former ruling Radical Left SYRIZA, including the 8-billion euro ($8.82 billion) development of the abandoned Hellenikon International Airport.

“If Greece continues to do well and credit risk continues to go down, you could see rates go even more negative,” Farmakis said of the move.