Great instability prevails in bond market due to the escalation of the crisis in Ukraine. The Russian Foreign Minister’s conversation with President Putin, which leaked early in the afternoon, which shows a “window for finding a diplomatic solution”, did not reassure the markets. In addition to the threat of a war that is stifling oil supply and hampering economic growth, the emerging turn of central banks has been an additional source of instability for markets. Inflation at record highs strengthens speculation that the US Federal Reserve could opt for an aggressive interest rate hike and that the European Central Bank could also raise interest rates this year.
Under the pressure of the above its performance Greek ten-year bond exceeded 2.60% today, despite the coordinated effort of the government to convince the markets of its intention to return the country to a trajectory of fiscal discipline and primary surpluses from 2023. According to an analysis by Piraeus Bank, the increase is more worrying. 10-year spread spread compared to the performance of the German 10-year period as in January it strengthened by 37 basis points to 188 bp after a decrease of 10 bp in December. In addition, in the first week of February, the 10-year spread strengthened to 231 bp, reaching the levels of May 2020, ie the period of the introduction of Greek bonds in the PEPP program of the European Central Bank (ECB). With the markets having started pricing the termination of the PEPP program, even with the flexible terms for Greece announced in December last year, the valuations according to the quantitative model remain low compared to the current level. Specifically, with the data of January, a “fair” price for the spread is at 142 bp, supported mainly by the high rates of economic activity but also the relatively low level of volatility in the international bond markets. However, according to the Risk Balance Index, the probability of higher spreads in the future (negative scenario for Greek bonds) has gradually increased since November 2021 compared to the probability of lower spreads.
Stournara-Staikoura intervention
The Governor of the Bank of Greece Giannis Stournaras in an opinion article published in ef. “Kathimerini” recognizes that the sensitivity of Greek securities returns to international volatility is higher compared to securities of other countries, due to their lower credit rating. Therefore, part of the expansion of the spreads of Greek government bonds (compared to the corresponding German) is due to the fundamental size of the Greek economy.
In any case, the sustainability of the Public Debt of Greece until 2030 is not disputed by anyone. After all, according to Mr. Stournaras, since only a small percentage of Greek public debt is refinanced by the markets, an increase in borrowing costs will lead to relatively small increases in interest costs, and therefore the impact on debt dynamics will be limited. (smaller than in other countries). But there is no doubt that rising government bond yields are dragging down marginal borrowing costs for the private sector, such as banks and businesses.
As for the Public Debt, the BoG Governor warned that it should also be taken into account that the volume of public debt is expected to increase after 2032, when the period of deferral of interest payments on the EFSF loan will expire. In order to address these problems, then, we must bring the future into the present, so that appropriate policy measures can be taken in a timely manner.
The initiative for early repayment of the last 1.9 billion euros from the loans received by the country from the IMF, announced through Reuters by the Minister of Finance Christos Staikouras, is also moving in the direction of strengthening the sustainability of the Public Debt.
The bond and foreign exchange markets
In the domestic market and more specifically in HDAT, transactions amounting to 66 million euros were recorded today, of which 16 were related to purchase orders. The yield on the 10-year bond closed at 2.61% from 2.66% on Friday against 0.24% of the corresponding German bond, resulting in a margin of 2.37% from 2.39% that closed at the end of last week .
In the foreign exchange market, geopolitical developments led to a new race for the US currency, with the result that it traded early in the afternoon at 1.1315 against the euro, from the level of 1.1343 dollars that the market opened.
The indicative price for the euro / dollar exchange rate announced by the ECB was 1.1316 dollars.
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