Greek Bond Sale In Doubt As Problems Re-Surface

Greece had planned a $10 billion bond sale in the U.S., but, thus far, investment demand is poor.  Giant bond manager Pimco has already announced their lack of interest and doubts that the issue will be successful.  Morgan Stanley will lead the sales effort which is scheduled to begin April 20, with a national road show.

Athens has reduced its expecations and now hopes to raise between $1 billion and $4 billion, an amount not sufficient to plug it's upcoming May budget deficit.  While April's shortfall is now satisfied, Greece needs to raise $12 billion for next month's requirements.

Greek debt spreads have resumed their widening  versus German Bunds, following recent conflicting comments from Euro-Zone members, reports of potential delays and legislative requirements needed to trigger the 30 billion Euros worth of loans offered by European Monetary Union (EMU) governments.

Ten-year spreads earlier Thursday hit a 5-day high of 4.27% compared to the benchmark 10-year German Bund.

That is a mere 16 basis points below the 11-year high hit on Thursday April 8, which was just before the EMU finance ministers agreed to a 3-year loan plan for Greece.

Short-dated Greek bond spreads fell on Thursday after the news that the country would start discussions on the loan package.  The yield on 2-year bonds fell to 6.34%  from 6.66% on Wednesday.  They hit a high of 7.1% last week.

Although the IMF has been involved in co-financed rescue packages before, as in Latvia and Hungary, it was clear that the fund took the lead role in setting conditions and disbursing tranches of money.  The IMF would be expected to make available another €10-15 billion as a stand-by loan on top of the €30 billon available from Euro-Zone member-states.

Analysts said uncertainty over the agreement remained high, with reports in the German press suggesting that it might have to be increased to €90 billon.

It appears that the crux of the Greek budget deficit is runaway corruption.

A study to be published in coming weeks by the Washington-based Brookings Institution, finds that bribery and patronage are major contributors to the country's ballooning debt, depriving the Greek state each year of the equivalent of at least 8% of its gross domestic product, or more than €20 billion (about $27 billion).

Greece's budget deficit averaged around 6.5% of GDP over the past five years, including a 13% shortfall last year.  If Greece's public sector were as clean and transparent as Sweden's, or the Netherlands', the country might have posted budget surpluses over the past decade, the study suggests.

Greece places last in the 16-nation Euro-Zone in a ranking by World Bank researchers of how well countries control corruption and last in the 27-nation European Union, tied with Bulgaria and Romania.

The Greek financial crisis continues to take center stage in the global financial turmoil.  Despite intermittent reports that solutions have been reached, it's clear that a long-term solution will be far more problematic.  Until the situation is truly stabilized, Greece's sovereign debt will be at risk.

Marko's Take

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