Busch: Getting the Greek to the Market

Tomorrow, Greece will attempt to return to the markets to raise capital for a refunding. It’s a safe bet it’ll go well, but we won’t get a true picture until Greece has to borrow money it doesn’t already have from the European Union.

In an effort to keep contact with the international capital markets, Greece is auctioning off E1.25 billion of 26 week bills on Tuesday.

According to Bloomberg, Greece has E4.5 billion of short term securities to coming due between July 10 and July 23rd. According to the IMF, this roll-over isn’t fully funded by the E110 billion loan facility that Greece received in May.

The focus will be on the interest rate that they will have to pay the markets to draw interest.

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Greece got their loans from the EU at 5% and the last 26-week bill Greece issued is trading at 5.7%.

However, the spreads on the bills are very large ranging from 3% to 7.5%.

Like Greek finances, I’m not sure you can trust what’s on the screen.

This is why this auction will be a perceived litmus test for what the markets believe about the Greek austerity plan and whether they are meeting it.

However, I’m a bit skeptical of the IMF’s information that Greece isn’t fully funded on the July 10th-July 23rd rollover. Would Greece really come back to the markets so soon if they didn’t know that they had the money already should the auction fail? I doubt it. Remember, the E110 loan facility was made this large to carry Greece past this year. Otherwise, we would re-run the May 19th scenario of refunding every time a new refunding occurred. Also, the auction is most likely to be mainly purchased by Greek banks that may not have a choice.

Overall, the credit situation in Europe hasn’t seen a reduction in fear over counter-party risk and therefore sovereign risk. Remember, 3 month Euro Libor is up over 76 basis points and continues to show funding pressures for European banks.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

The best thing that can be said about the sovereign debt situation in Europe is that it has significantly cooled and uneven growth has returned to the European Union.

The euro drop from 1.51 to 1.19has stimulated exports in Germany and other countries. Italy, Spain, and Ireland have all recently released better than expected economic data. The Greek parliament did pass the austerity plan and Greek Fin Min Papaconstantinou said last week that the country will beat the deficit target of 8.1% deficit-to-GDP.

Tomorrow’s debt auction will likely go well, but will not be the true test of the market’s view. Until Greece stops borrowing from the European fund, we won’t know what their true financial state is. There will be no come-back concert for the country until then.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.