Greece’s Bond Plans May Be Wishful Thinking

January 16, 2014, 9:12 AM ET

ByEmese Bartha

The Wall Street Journal

Greece wants to make a new start.

Boasting its first primary budget surplus in a decade, the country at the center of the European debt crisis wants to sell government bonds–possibly in the second half of the year–for the first time since the spring of 2010.

Various high-ranking Greek officials have expressed their wish to bring the country back to the debt markets. Most recently, finance minister Yannis Stournaras spoke about this at a briefing with foreign journalists who visited Athens last week as Greece took over the European Union’s helm.

Such a move, if successful, would mimic steps of fellow bailout recipients Ireland and Portugal. Both of those two countries ended up issuing debt cheaply and successfully while still in receipt of bailout funds in 2013, and Portugal did so again this year. Ireland issued successfully, entirely under its own steam post-bailout, in 2014.

Currently at the helm of the six-month rotating presidency of the Council of the European Union, Greece is in a good position from a marketing point of view to give investors time to absorb its plans and for the government to publicize the results of it reform progress.

And as fears of a euro-zone exit have receded, Greek government bond yields have dropped sharply. Nowadays, 10-year Greek yields are trading very safely at a single-digit levels, currently around 7.68%, sharply down from the stratospheric levels of above 30% seen in late 2011 when Greece’s mammoth €200 billion ($272 billion) debt restructuring was already on the cards.

But that’s where the good news stops. Despite the pains and progress made by Greece in the past few years, analysts and investors reckon a Greek government bond issue any time this year may be ambitious.

For one thing, Greek bond yields remain much higher than those of their Irish, Portuguese, Spanish or Italian peers—and at a level that’s at least a couple of percentage points too high to realistically think about a debt issuance. The current level is beyond the yield that pushed both Ireland and Portugal into their respective bailouts when investors calculated that their borrowing costs weren’t sustainable over the long term.

Analysts also flag the still lingering political and economic risk in Greece, where the economy continues to stumble through a protracted recession, unemployment remains close to 28%, and support for the ruling coalition has weakened.

“The market euphoria cannot belie the high level of risk that continues to prevail in Greece,” said Daniel Lenz, economist at DZ Bank. Among the risk factors he cites is the government’s dwindling majority in Parliament—it now holds just a three seat majority in the 300 member chamber–and the country’s continued need for financing.

Greece faces a financing shortfall of around €11 billion by the end of 2015, according to an earlier estimate of the International Monetary Fund. To be fair, Greece has already regained a measure of market access—for the past two years it has been issuing 3- and 6-month T-bills, but has yet to test the waters with any longer maturity.

Daniel Karnaus, fund manager at Vontobel, also said the time isn’t ripe yet for Greece. “As long as 10-year yields stay above 5%, I think it’s wishful thinking from Greece to tap the market. I can’t see the conditions for Greece for a bond issuance this year. It’s totally out of scope, in my view,” Mr. Karnaus said.

Despite the doubts, Greece’s government remains determined and dismisses the naysayers. “As the finance minister, and the prime minister, have said repeatedly: this year we will return to the markets,” said a finance ministry official. “Regardless of what others may say, all of our effort this year is focused on returning to the market.”

-Write to Emese Bartha at emese.bartha@wsj.com

Alkman Granitsas in Athens contributed to this post.