Long-term investors standing aloof from the Greek debt crisis want holders of its government bonds to take a loss big enough to slash the country's debt to sustainable levels before they consider returning.
Greece is still expected to default at some point and for most investors who have dumped bonds over the past two years and who are crucial to put the ailing economy back on its feet, the longer that is delayed, the longer it will be before they consider looking at Greek assets again.
A likely second bailout, currently under tortuous negotiation, is seen only as a means to buy time for euro zone banks to provision for eventual losses and protect the bloc's larger economies from contamination, while the reforms attached to the package will be hard to implement in the face of deepening public resentment.
"We would buy if the economy manages to reform itself and if the banking sector is self-funded, but I don't think that's going to happen on a five-year view," said Russell Silberston, head of global interest rates at Investec Asset Management, who manages $31 billion worth of fixed income assets globally.
"Our view is they also need to default before that."
Greek Finance Minister Evangelos Venizelos told Reuters on Monday he intended to return to market funding in the middle of 2014.
Most investors don't think that will happen without a major restructuring to make Greece's debt mountain sustainable and remove it from the downward spiral of constant deficit-cutting which will wreck any chance of economic recovery.
"For Greece, starting over is the only solution," said Kommer van Trigt, a bond fund manager with Robeco Group, managing about 40 billion euros ($57 billion).
Silberston said the "first default" was near as France's proposal for a voluntary rollover of Greek debt seemed to be gathering momentum. But that would not solve Greece's solvency problem.
With debt expected to reach 1.6 times its 2011 economic output, economists say Greece would need a primary budget surplus of about 5 percent of gross domestic product, compared with last year's 5 percent primary deficit, simply to stabilize its debt at current levels.
On the assumption that Greece's debt-to-GDP ratio would peak at 166 percent, Evolution Securities calculations show a haircut of about 64 percent would be needed to bring the ratio back to the ceiling of 60 percent agreed in the EU'S Maastricht Treaty.
The Greek debt curve fully prices in a 50 percent haircut on average, according to UniCredit. But imposing losses on bondholders before gaining credibility may be in vain.
Investec's Silberston said besides a haircut, he would want to see several quarters of primary budget surpluses achieved in a sustainable way, and not through privatization revenues, before buying Greek debt.
"The big problem with a major haircut is that ... you would still need to have a very high premium for people to buy Greek debt after that date because if you look historically at haircuts, they tend not to be in isolation," said Jack Kelly, an investment director on global government bonds at Standard Life Investments, which manages assets worth 157 billion pounds ($250 billion).
CHEAP IS NOT ENOUGH
After an immediate Greek default was avoided with 12 billion euros of emergency loans and a fresh round of belt-tightening measures agreed in Athens, yields on some of its debt have fallen by more than 200 basis points.
But at over 27 percent for two-year paper and 16 percent for the 10-year they are still punishingly high. Only short-term investors were behind the rally, which was also exacerbated by thin volumes.
Kelly said Standard Life, which sold its last holdings of Greek debt in June 2010, would only buy it back if it reached investment grade again or as part of a EU common bond, something Germany has ruled out.
Although rated above junk, Portugal and Ireland, the other bailed out countries in the euro zone, are also considered a no-go by long-term debt investors because of the risk they will be dragged down with the Greek crisis.
But those countries have a chance to turn things around faster than Greece. The best placed is Ireland, whose exports are more competitive and its labor markets more flexible.
"The numbers are a bit better for Portugal and Ireland," said van Trigt at Robeco Group. "At this point we are not really differentiating between Greece, Ireland and Portugal. Going forward, a country like Ireland has a better starting position."
THE RIGHT PRICE
With the timing and magnitude of any Greek debt haircut hard to predict because politics plays a greater role than mathematics, it is hard to assess what price would draw investors back into Greece.
A common comparison is Uruguay's debt restructuring in 2003, when the price for its 2012 bond rose from about 40 to 60 cents in the dollar immediately after the event.
Greece's June 2020 bond trades at 55 cents in the euro.
"At prices of under 50, there will be value in eight- or nine-year (Greek) bonds at some stage," said Ciaran O'Hagan, strategist at Societe Generale. "But only when accounts are rendered sustainable, e.g. through restructuring."
That only holds good if Greece avoids a unilateral and disorderly default like Argentina's in 2002. It organized large debt swaps in 2005 and 2010 yet is still shut out of debt markets.
Market pricing before any haircut could offer opportunities to buy on the view that Greek bondholders were too pessimistic about the extent of such a move. But it would not help Greece, as those investors may bail out soon afterwards and their spending would be small.
"Those would only be incredibly hot money," said Robert Talbut, chief investment officer at Royal London Asset Management, which runs assets worth 40 billion pounds.
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