Greece will vote for a new government on Sunday, but the bond markets aren’t all that worried at first glance. After a spike in recent weeks, driven by polls showing that left-wing group Syriza would take control of the country, the country’s bond yields have dropped in recent days. On this morning’s market the Greek benchmark 10-year had a yield of 9.05% as measured by Bloomberg, but hit lows below the 9% barrier yesterday.
The cause of the rise in Greek bond prices is the same force that has been squashing yields across the continent, and the world, in recent weeks. The ECB announced a 700 billion euro per year bond-buying package on Thursday that will have serious ramifications for yields. Greek debt still returns a reasonable amount, however, owing to the risks of the election, and the country’s perilous financial situation.
Greece’s special case
Greece is now assumed to be a special case when it comes to any decision in European politics, including those by the ECB. In answer to questions about whether the Eurozone’s central bank intends to purchase the debt of the country, the intention to do so was affirmed by Ignazio Visco, a member of the governing council of the European Central Bank. Such purchases will not, however, start until June at the earliest.
With the “risk sharing”element of the European quantitative easing program in mind, the national central banks that will have to hold Greek debt may not be too happy, possibly leaving that particular responsibility the ECB itself. If that’s the style of “risk sharing” that Mr. Draghi and the governing council envision, it would be so in name only, leaving most of the possible losses squarely on the shoulders of the chief Eurozone authority.
With the yield on the Greek 10-year breaking the 9% barrier yesterday, after hitting close to 11% just a couple of weeks ago, it’s clear that bond-buyers are expecting a substantial effect on the price of the securities owing to European intervention. They may be right, but Greece is a special case in the field of European bonds.
The effect of the bond buying program on the Greek securities market is likely more difficult to predict than the effect elsewhere on the continent. A mix of very strong effects are now pushing demand for the country’s bonds with this weekend’s elections chief among them.
Greek elections drive bond prices
There’s no doubt that ECB action has had a strong effect on Greek yields, as it has elsewhere on the continent, but the elections are a much stronger force in the short term. Should Syriza win, the chances of the country defaulting spike in the eyes of investors. A hung parliament, in which no government is formed, may be an even worse outcome for bond prices.
In the longer term, however, the ECB’s bond-buying program could, if targeted in that direction, buy every single Greek bond on offer. The country’s total outstanding debt was less than $400 billion at the end of last year, just over half of the total ECB QE program.The limited size of the country’s total debt makes it a problem relatively easy to solve with the large reserves available to the currency bloc as a whole.
This is a debt deal for Greece as much as for the other struggling European nations, and whatever party wins the elections will likely be able to see that. Syriza has already made moves toward reassuring bondholders about that possibility, and the power of European technocracy has already cooled some extreme politicians. The ultimate effects of the elections on bond yields remains to be seen but, for now, investors are interested in trusting European centrality to defuse the situation, and diffuse Greek debt throughout the continent’s national central banks.