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Greece Is Set to Return to Financial Markets in July

Greece is preparing a make-or-break return to the financial markets next month as it plans to raise about 4 billion euros ($4.96 billion) in its first borrowing attempt since last month's bail-out by the European Union and International Monetary Fund.

View over the caldera of Santorini in Greece.
Tom Pfeiffer | Getty Images
View over the caldera of Santorini in Greece.

Petros Christodoulou, head of the Greek debt management agency said: "Our intention is to roll over three-, six- and 12-month treasury bills maturing in July."

The EU and IMF have approved the roll-over of short-term debt in July and October this year under the terms of a 110 billion euros loan agreement with the Greek government.

However, investors warned that the Greek move would be a gamble because a poor auction could hit sentiment hard. The big test is how much Athens will have to pay in interest rates to attract buyers. Unsustainably high premiums would alarm investors and undermine confidence.

Steven Major, head of fixed income research at HSBC, said: "Confidence is fragile at the moment and any bad news out of Greece could trigger a further crisis."

Another banker added: "If the auction goes badly for Greece then it will hit other countries such as Portugal and Spain, which could end up having to use emergency support loans like Greece."

The Greek government is betting that market confidence will improve before the bond auctions on July 13 and 20 because reforms of the state pension system, the centerpiece of its three-year fiscal consolidation plan, are due to be approved by parliament next week.

The governing Socialist party has warned that the pension vote is key to meeting the EU-IMF program's targets.

A bill unveiled last week triggered strong reaction over provisions for cuts in pensions and for raising the retirement age to 65 for both men and women. George Papandreou, prime minister, has threatened to call a snap election on the pensions issue if Socialist deputies break ranks, according to party officials.

However, Athens officials accept that Greece will have to pay a yield premium at the bond auctions as it will take time to convince investors that fiscal consolidation is on track.

"This is short-term debt which is not so large in the scheme of things ... There is plenty of time in front of us before we return to the markets for a sizeable amount," one official said.

Greek, Spanish and Portuguese bond markets came under pressure last week as the economic outlook deteriorated because of poor US and European data.

This prompted more worries over weak growth – not helped by severe austerity measures in those countries, which will restrict their ability to repair public finances and reduce debt.

Greek 10-year yields rose above 10 percent to highs not seen since a 750 billion euros support package was unveiled on May 10.

Spain and Portugal were last week forced to pay big yield premiums to attract investors because of fragile confidence in their economies and growing worries that the world was heading for a double-dip recession.

Harvinder Sian, euro rates strategist at RBS, said: "There is a danger that yields will rise to a point where they are unsustainable for countries such as Spain and Portugal. They could have to use emergency loans."

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