Shrinking foreign demand and a high risk premium on Greek government bonds are fueling fears that markets may ultimately give the thumbs down to Greece's efforts to meet 54 billion euros of funding needs this year.
This is raising the prospect that Greece may have to test the generosity of European governments and the International Monetary Fund, which pledged last month to aid the country if it has problems tapping investors for funds.
"Without some miracle, the performance of recent Greek debt sales has been poor enough and the absolute yield has gone so high that the use of the bailout package could be more palatable than conducting another round of domestic austerity measures to overcome spiraling coupon payments," said David Schnautz, bond analyst at Commerzbank in Frankfurt.
Greece has conducted three syndicated bond sales totaling 18 billion euros so far this year, most recently on Monday. But all three bonds have performed poorly in the secondary market since their launch.
The announcement by Athens of several fiscal austerity packages,
European governments' unprecedented promise of a financial safety net, and a decision by the European Central Bank to extend easy collateral rules for its money market operations have all failed to produce a significant drop in Greece's sky-high borrowing costs.
The spread of the 10-year Greek government bond yield over the 10-year German Bund yield was 352 basis points on Thursday. That was down from a record 405 bps hit in January but up from 307 bps before Monday's sale, and more than double the spread for other euro zone countries.
Equally ominous is a drop in both total bids and the ratio of foreign investor demand at each sale -- a trend which cannot be sustained indefinitely, given the weakness of Greece's economy. Non-domestic investors accounted for 80 percent of purchases of the first bond in January, 77 percent of the second, and 57 percent of the third.
A surprise sale of 12-year debt via an unscheduled auction on Tuesday raised only 390 million euros; since Greece had said it aimed to raise up to 1 billion euros in the auction, that result was also seen as disappointing by the market.
Last week, German state bank KfW stated that it would shun the next Greek bond offers.
"It all shows erosion in the investor base. Making matters worse, the secondary market performance of all three syndicated bonds this year should make investors think twice before increasing their GGB (Greek government bond) exposure in the next funding round," said Schnautz.
One concern for investors is Greece's recession, which will make hitting fiscal targets harder and is likely to be prolonged by the austerity measures. The Markit Manufacturing Purchasing Managers' Index for March, released on Thursday, suggested the recession was still worsening.
Investors also worry about the strength of the financial safety net. Angered by Greece's fiscal indiscipline, Germany delayed an agreement on the net for weeks, raising questions over whether Berlin might veto its use in an emergency. And the IMF has not clarified how it would manage the politically sensitive process of cooperating with the European Union.
A third source of concern is whether Greece has the right sales strategy to unload its debt in the market.
Because of the long-term risks in holding Greek debt, much of the market would prefer shorter-dated paper. In a funding program document at the start of the year, the Greek Finance Ministry indicated such paper could be expected; it said it would issue 40 billion euros of three-, five- and 10-year maturities, while the remainder of the 54 billion euro funding need would be met with Treasury bills and foreign currency debt.
But the new chief of the Greek Public Debt Management Agency (PDMA), Petros Christodoulou, who was appointed in mid-February, has so far only partly met those expectations. Greece has this year issued bonds with maturities between five and 12 years, but no three-year debt.
"I have to assume there is a strategy here, otherwise the choice of the seven-year sold on Monday makes no sense as it was not what the market wanted," said one dealer in London.
Peter Chatwell, a bond analyst at Credit Agricole, said Greece appeared to have adopted a strategy of issuing toward the long end of the curve.
Some analysts said they thought Athens wanted to lock investors into longer periods to obtain more time for its economy and tax receipts to recover, and to avoid bunching up redemptions. Greece will have to redeem about 20 billion euros of debt in April and May, a major refunding headache.
Another part of Greece's strategy is attempting to diversify its investor base by moving into other currencies; it aims to issue a global U.S. dollar bond in late April or early May.
But the market believes this issue would probably be around $2 billion to $3 billion, not nearly enough by itself to resolve Greece's immediate funding needs.
For these reasons, many analysts think Greece may be unable to cut its borrowing costs any time soon to levels that it could afford over the long term.
Christodoulou last month said he aimed to have Greek bond spreads fall to Irish levels, now about 140 bps.
This week, he told Bloomberg Television that he expected the spread to drop to around 200 bps by the fourth quarter this year, a somewhat more modest target.
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