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Greek Fixed Income Monitor – August

The Eurogroup on 24th May welcomed the successful review of the economic programme and moved on with the first sub-tranche disbursement of €7.5 bn. As a result the Greek corporate bond market improved while the Government Bond Index stabilized as well. Interestingly, in the period following the United Kingdom’s decision to exit the Eurozone and the consequent decline of the index by 6% in early July, Greek bonds returned to their prior levels, recuperating their losses. In particular, the Government Bond Index returned to its early June level, posting marginal gains of 0.84% during July and August. An important factor offsetting the negative impact of Brexit on Greek markets was the re-establishment of the waiver by the ECB, which boosted, to a certain extent, liquidity in the economy. The overall result of these developments was that, apart from a short-term downward trend in the last two weeks of July, the index retained its YTD gains of 6.48%. However, it is equally important to note that in comparison with the previous year (increase of 23% on a y-o-y basis ), the growth rate in the bond index has significantly slowed down.

Limited investor interest during July-August is mainly due to worries about the successful completion of both the first and the second review. Any delay is expected to renew political uncertainty scenarios, strengthening the cautious attitude of investors.

On the other hand, a direct consequence of a successful completion of the second review will be the drastic reduction of the country's borrowing costs and the possible inclusion of the country’s debt instruments to the ECB's quantitative easing programme. However, a necessary condition for the above favorable developments is the successful conclusion of the debate on the debt, which is not expected to occur prior to the German elections in September 2017. This delay may not compromise the refinancing of maturing bonds and loans worth €26.1 billion and the payment of €66.7 billion in interest during the years 2021 to 2024, but may affect expectations regarding a possible return to the market, with low borrowing costs, in the near term.

Since early July, the Corporate Bond Index recorded a significant upward trend, starting from 110.9 points and reaching 114.6 points at the end of August. This was primarily the result of the announcement concerning the gradual lifting of capital controls by the Bank of Greece and the consequent normalization of the costs imposed on the private sector. In such an environment, the yield to maturity of the index reached a record low in mid-August. Specifically, the weighted average yield of the index fell to 4.4% on 08.19.2016, reduced by 35 basis points since late July. Further drop in yields is expected to reduce the cost of refinancing maturing corporate bond issues. Since the beginning of the year, the Corporate Bonds Index has increased by 1.6%, significantly improved as compared to the losses recorded in the previous year.