Unexpected Greek foray into debt markets

This Euro-year has all been about scrutiny of those profligate spenders, the Greeks.  May’s big worldwide stock market declines were largely triggered by fears of a Greek budgetary collapse and the contagion it would have throughout Europe.  Now those Greeks are back in the realm of the unexpected.

Specifically, it was announced yesterday that Greece intends to tap worldwide debt markets to try and raise approximately $5 billion of sovereign debt.  Recall that Greece’s inability to tap debt markets and roll over existing debt into new issues was a part of what caused the imbroglio in May.  Debt investors saw a Greek economy unable to support its debt load and they shied away.  The Europeans responded with a huge bailout package meant to calm investor fears.  Well Greece still has access to those bailout monies.  So why would they try and tap public markets now?

Analysis: It’s my opinion that the Greeks are trying to demonstrate to the world that their economy is on a more solid footing.  Austerity measures have been put in place and they have been audited independently.  So if the Greeks can tap private investor funds by raising debt they will have demonstrated a certain amount of solidity thought impossible just two months ago.  Additionally, the Greeks are probably trying to maintain open capital flows between itself and other nations’ investors.  In other words, they don’t want the flows to be staved off for generations to come.

However, there is a BIG risk to the Greek debt offering.  Namely, what if investors don’t buy the Greek debt issue?  That would probably send paroxysms of fear through global financial markets again.  If the Greeks succeed then financial markets may finally calm down.  Why might a prospective investor buy into Greece at this moment of greatest turmoil?

For one, the Greeks do have access to the bailout monies.  As an investor, that would have to give you greater comfort than you would have had earlier this year.  Additionally, the Greeks have undertaken severe austerity measures and it looks as if more are to come.

I cannot guarantee you what the response will be from global financial markets.  However, my intuitive sense is that Greece will be able to place its $5 billion of debt.  That issuance will be accompanied by tremendous noise in the press about the risks that will dilute the psychological boost that such an issuance is meant to provide.  Without being too snide, if I were a European finance minister (say in Germany) I would secretly buy the snot out of this Greek debt issue.  That would be some of the best $5 billion that could be spent.

Let’s hope Greece’s mini-gamble pays off.

Importance grade: 9; succeed big and worldwide financial markets will be giddy.  Fail big and worldwide financial markets will be queasy.  All eyes will be on the sales July 13th and 20th.

Jason