High borrowing costs forced Greece to scrap plans to auction one-year paper next week to roll over maturities but the overborrowed country will go ahead and sell six-month T-bills, its debt agency said on Friday.
Greece wanted to roll over 2.16 billion euros of six-month and one-year T-bills, its first return to market borrowing since securing a 110 billion euro emergency funding deal with the IMF and its euro zone partners in May.
Despite some progress on the fiscal front and the passage of a key structural reform to make the pension system viable on Thursday, 12-month yields remained unattractive — around 5.9 to 6.5 percent, dealers said. The country can fund itself at about 5 percent via the emergency loan package.
Comparatively, Germany pays about 0.63 percent for one-year funds
"It will take more work and results to become more convincing and be able to go out and borrow beyond six-months at lower rates," said a treasurer at a Greek bank who did not want to be named.
"But the 3-month and six-month issues will be easily absorbed, at yields around 4.0 and 4.7 percent or better, respectively," the banker said.
The debt agency will follow up with an auction of three-month paper on July 20 as it needs to roll over 2.4 billion euros of T-bills maturing on July 23.
STILL EXPENSIVE
Greece's borrowing costs have soared since its debt problems came to light late last year, sparking fears of contagion in the euro zone and weakening the euro as austerity measures to shore up public finances are expected to hurt economic growth.
The EU/IMF bailout plan enables Greece, whose debt-to-GDP ratio is seen peaking at 149 percent in 2013, to stay away from markets until the first quarter of 2012. But it can continue to issue T-bills during the three-year funding period.
"It was always a risk they would be asked by the market to pay too much for treasury bills," said Chris Pryce, a director at Fitch Ratings.
"It's not a particularly good sign for the Greek government but it's not a cause of extra worry either because they have the alternative to use the funds made available by the EU and the IMF," he said.
The debt agency (PDMA) said it will auction 1.25 billion euros ($1.58 billion) of 26-week T-bills on July 13. The settlement date will be July 16. Only primary dealers will be allowed to participate and no commission will be paid.
"During the auction, non-competitive bids can be submitted up to 30 percent of the auctioned amount," PDMA said. "On top of that, primary dealers can submit non-competitive bids of up to another 30 percent of the auctioned amount until July 15."
VOLATILITY A TURN OFF
Last time Greece issued six-month T-bills, in April this year, they were priced to yield 4.55 percent, up sharply from 1.38 percent in January.
Traders say that with banks facing a funding cost of 1.0 percent when T-bills are accepted by the ECB, the issue offers an opportunity to grab yield given that default is out of the picture in the next 12 months thanks to the loan package.
But the high price volatility of Greek debt paper has turned off some buyers of short-term instruments like money market and bond mutual funds, despite the attractive carry.
"The carry is attractive but from a mutual fund perspective, the high volatility given the daily mark-to-market pricing of net asset values is a disincentive. Volatility makes mutual fund investors nervous," said a money market fund manager who did not want to be named.
"You can get relatively equivalent yields from bank deposits and they are not subject to this daily fluctuation which is reflected in the net asset value per share," he said.
