Greece’s economy is worse than its bond yields suggest

Although Greece’s return to the bond market earlier this month was a victory, the country’s economy still faces a triple whammy of low growth, high unemployment and lasting deflation.

Demand for Greece’s first major bond offering since the onset of its economic crisis remains high, with the new five-year notes yielding 4.787 percent in secondary trading, down from the yield at the April 10 issuance of 4.95 percent.

It’s a far cry from 2012 when Greek 10-year note yields surged to as high as 28 percent as investors feared a default during the European debt crisis. Today, 10-year Greek notes are yielding below 6 percent as investor optimism rebounds.

But analysts said that optimism may be pushing yields down to unrealistically low levels.

“Greek debt is absolutely crazy at those levels because although Greece is running a primary budget surplus…its economy is in tatters and not showing growth,” said Yra Harris of Praxis Trading.

Sounio_photo Moustafellou_153x121In the overall low-yield euro zone, investors are seeing Greek bonds as a way to capture lucrative returns in a diversified bond portfolio, Harris explained.

The Greek economy is in better shape than it was three years ago. The government is running a higher-than-expected primary budget surplus of €1.57 billion for the first quarter of the year, which will allow Greece further debt relief, including lower interest rates on the country’s loans and extensions for repayment, from its euro zone creditors.

Greek Deputy Finance Minister Cristos Staikouras told journalists Wednesday that the country and its economy “are in a definitely better position,” according to the Associated Press. But the economic data point to continuing problems.

With a daunting unemployment rate of 27.3 percent, Greece’s GDP for 2014 is forecast to grow at an annual rate of just 0.6 percent, according to the European Commission.

What’s worse, deflation is adding to Greece’s real debt burden. The country’s consumer price index, which fell 1.3 percent in March, has been in negative territory since March 2013. The longer that lasts, the more real inflation-adjusted money Greece has to pay for its debt burden of €318.70 billion, which accounts for 175 percent of its GDP.

Many investors bet European Central Bank will start printing money to stop prices falling further. But the reality is that in the 18-country euro zone, it’s difficult to set monetary policy that will also benefit other members such as Germany, where deflation is not yet a problem.

If Greece is in such a bad shape, why are hedge funds, mutual funds, banks and other big money managers eager to buy the country’s debt?

Praxis Trading’s Harris suggests the Depression-era economist John Maynard Keynes may have had the best answer a century ago — “Markets can remain irrational longer than you can remain solvent.”

Leave a Reply