Thursday, June 8, 2017

UPDATE 1-Greece targeting sub-5 percent yields for market return

Wed Jun 7, 2017 | 2:17pm EDT


* Greece wants yields below 5 pct before debt market return

* ECB support would boost chances considerably

* Decisions will depend on outcome of Eurogroup meeting (Adds detail, background, quotes)

By Lefteris Papadimas and Marc Jones

ATHENS/LONDON, June 7 Greece will return to markets once its borrowing costs drop below 5 percent, sources told Reuters, which could happen if the European Central Bank includes Greek bonds in its 2.3 trillion euro asset purchase programme.

That important caveat depends primarily on whether Athens can agree a debt deal with the euro zone and International Monetary Fund next week that is good enough to convince the ECB, which meets on Thursday, to come on board.

It remains enough of an uncertainty that officials involved in the talks are reluctant to call the outcome. But bankers have been quietly sounding out investors for what would be Greece's first return to markets since 2014.

The response has convinced Athens, which still has a public debt ratio of 180 percent of gross domestic product and an economy which is barely growing, to go ahead if the conditions are right.

"A return to the markets with a five-year bond should be with yields below 5 percent," said a Greek government official who requested anonymity.

Greece's five-year yield is currently around 5.9 percent, according to Reuters data.

Bond market investors estimate that could drop by between 0.75 of a percentage point and 1.5 percentage points if the ECB does start buying Greek debt.

Greece's borrowing costs have fallen in the wake of previous deals with its international lenders, as shown in this graphic

Investors also point to how the yield gap between 10-year Portuguese and German bonds shrank by 1.4 percentage points as the ECB prepared to launch its asset purchase programme, which provided a guaranteed buyer for Portugal's debt.

"We still think you are about 75 basis points away from a point where you can start to have that dialogue about Greece returning to the market," said BlueBay Asset Management's Mark Dowding, whose firm owns Greek debt.

"But I think that (the ECB signalling it would buy Greek bonds) could certainly be a catalyst that would push yields into that zone."

While the ECB would be important as a backstop for investors who fear things might sour again in Greece, the actual amount of Greek bonds it could buy at the moment are relatively small.

Greek sources suggest it would be 2-3 billion euros this year. That is roughly 10 percent of the 28 billion "tradable" Greek government bond market, according to Societe Generale, although the bank thinks the ECB may struggle to buy anything for a while.

The euro zone's central bank cannot buy more than a third of the bonds issued by any country, and it still holds more than 10 billion euros worth of Greek paper it bought in 2010-2011, during the early phase of the bloc's debt crisis.


Borrowing longer-term at 5 percent would not be sustainable for Greece, which currently pays about 1 percent on its European Stability Mechanism loans and around 3.5 percent on lending from the International Monetary Fund. But tapping markets at all would be a sign of progress.

Borrowing cost at that level would also roughly match the 4.95 percent Athens paid in 2014 when it made one of the fastest-ever returns to debt markets following a default.

The plans could still be delayed, however. ECB Executive Board member Benoit Coeure told Reuters last month it wanted to see "a clear description of the debt measures and how much they would contribute to the sustainability of Greek debt".

ECB chief Mario Draghi will be asked exactly what that means at a news conference on Thursday, before euro zone finance ministers and the IMF head to next week's Eurogroup meeting in Luxembourg with a long list of potential debt relief measures.

They will include delaying loan repayments anywhere from zero to 25 years and making them cheaper. The catch is that Germany and others want to wait until August 2018 to deliver them, to motivate Athens to stay on track with its programme of economic reforms.

If Athens is willing to accept such a plan, it would leave the ECB with a decision to make.

The debt measures are unlikely to be as straightforward as it would like, but if euro zone ministers and the IMF have both given the deal their blessing, refusing to buy Greek assets could leave it open to accusations of discrimination.

"The fudge needs to be good enough that it gives the cover for the ECB to start buying Greek bonds again," said BlueBay's Dowding.

(Additional reporting and graphic by John Geddie in London; Editing by Tom Heneghan and Catherine Evans)

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